There are several methods and tools to invest and grow your hard-earned money.  There are over 900 mutual funds and ETFs available to investors in India.  Yes, that’s a whopping number.  So, how do you go about selecting the mutual funds? Much depends on your investment style (active Vs. passive), risk type (aggressive, moderate, or conservative), and awareness level (informed Vs. naive). One thing is clear: equity investment is the best hedge against inflation!. So, stay invested in equities! 
Mutual funds are good vehicles to invest in equities for both the active as well as the passive investor.  There are mutual funds to cater to different investment styles, risk types, awareness levels of investors.  The problem is that there are too many of them. As you might expect, there are the good, the bad, and the ugly mutual funds.  The purpose of this article is to recommend a portfolio allocation strategy, and highlight good mutual funds that cater to the different types and needs of investors.

The well-studied core-satellite portfolio construction approach provides the broad foundation for this article.  The core investments comprise funds that are tilted towards the large-cap universe.  The core provides the market returns. The satellite investments comprise funds that are tilted towards the mid-cap and small-cap fund universe.  They satellite provides the alpha – excess returns from the market. The dimension of thematic funds (value, sector) has not been explicitly included in this categorization. 
There are good value-based, and go-anywhere mutual funds that could fit in both core as well as satellite portfolio. And, they should be included depending on their performance.  Thematic funds based on sectors are only for the well-informed investor as they carry a high degree of risk.  They have been excluded in this analysis. This portfolio allocation strategy specifically calls out investments in ETF/Paper Gold as a category. Gold provides stability and hedges exposure to equities in volatile markets.  However, if you have significant exposure to physical gold, this allocation is not necessary and this chunk could be added to the core portfolio.

The following two tables illustrate this: the asset allocation mix (Table 1) and some excellent time-tested funds that could be part of the portfolio (Table 2).  I will update this table as I discover other excellent funds. Regardless of specific funds chosen in the allocation, this strategy provides a mechanism to access good funds, balance risk, and maximize your returns.

Table 1: Core-Satellite Mutual Fund Investment Portfolio

ASSET ALLOCATION	CORE EQUITIES	SATELLITE EQUITIES	DEBT & INCOME	GOLD ETF	LIQUID FUNDS
AGGRESSIVE	50%	30%	5%	10%	5%
MODERATE	35%	15%	35%	10%	5%
CONSERVATIVE	20%	0%	55%	10%	15%

Table 2:  5 Star Funds with high Relative Strength

Fund Type	Name	Large-cap/ Midcap-Smallcap Mix	Long Term Relative Strength Score**	Short Term Relative Strength Score**
CORE EQUITIES	HDFC Top 200	80/20	99	86
CORE EQUITIES	HDFC Equity	65/35	100	95
CORE EQUITIES	Fidelity Equity	75/25	97	92
SATELLITE EQUITIES	IDFC Premier Equity	15/85	100	99
SATELLITE EQUITIES	ICICI Prudential Discovery	25/70	99	89
SATELLITE EQUITIES	Sundaram Select Midcap	20/80	98	93
DEBT & INCOME	HDFC MIP - LTP	-	78	53
DEBT & INCOME	HDFC Multiple Yield Fund	-	70	50
DEBT & INCOME	Templeton Short Term Income	-	61	43
GOLD	Benchmark Gold BeES	-	80	54
LIQUID	LIC Liquid Fund	-	49	35
LIQUID	HDFC Cash Management Fund Savings	-	47	35

________________________________________________________________

*Fund Ratings:

5 Stars – Superior and consistent performance over short-term and long-term among its peers.
4 Stars - Good performance over short-term and long-term among its peers. Occasional underperformance is seen.
3 Stars – Steady/Par performance over short-term and long term. Periods of underperformance is seen.

**Relative Strength Score Methodology:

1. Score is percent score (max: 100%)
2. Score is weighted average across different periods
3. Weights vary whether looking for short-term or long-term performance
4. Score is across fund universe (over 900 funds)
5. Long term score is calculated for the period: 6 months – 5 years
6. Short term score is calculated for the period: 1 week – 1 year

**Interpreting Relative Strength Score:

1. For pure equity funds, a score above 90 is indicative of superior performance.
2. For hybrid/balanced equity funds, a score above 75 is indicative of superior performance.
3. For debt/income funds, a score above 50 is indicative of superior performance.
4. For liquid funds, a score above 35 is indicative of superior performance.