Funds & bonds
Indices, active funds, bonds, and cash—for most people broad index + bond/cash should dominate; singles are supplemental.
1. Tool map
| Tool | Pros | Cons | Typical use |
|---|---|---|---|
| Broad index ETF/feeder | Diversified, cheap, transparent | No alpha | Outside circle; core beta |
| Sector / theme ETF | Express sector view | Concentrated, volatile | Subject to sector cap |
| Active equity fund | Possible outperformance | Fees, style drift, key person | Track manager over years |
| Bond / short-duration fund | Lower vol | Rate and credit risk | L0/L1; equity dial |
| Money market | Liquidity | Low return | Emergency buffer |
2. Index fund checklist
- Index definition clear and matches view
- Tracking error, AUM (too small → closure risk)
- Total expense ratio; for ETFs, spread and volume
- Distribution policy: cash vs reinvest (tax and rebalance plan)
3. Active fund checklist
- At least 3 years return and max drawdown vs peers
- Read semi-annual report: top holdings match stated style
- Manager tenure; concentration in institution holdings
- Fees vs visible alpha (high fee needs strong reason)
tip
Treat active funds as outsourced research: if you cannot explain why the manager holds the top ten, do not size it large.
4. Bonds and rates
| Type | Main risk | When to add |
|---|---|---|
| Government / policy bank | Price down when rates up | Early easing cycle; equities rich |
| Investment-grade credit | Spread widening | Stable growth; need bit more than MMF |
| Convertibles | Equity + bond hybrid | Sector view without full equity |
Simple rule: no credit you cannot underwrite; watch duration—longer duration, more rate sensitivity.
5. Cash and L0
| Tool | Liquidity | Notes |
|---|---|---|
| Money market fund | T+0/T+1 | Daily emergency |
| Bank T+0 / ultra-short | Product-specific | Read redemption terms |
| Reverse repo | Spikes at quarter-end | Temporary idle cash |
L0 target: 6–12 months necessary spending, separate from L2 equity mentally.
6. DCA vs lump sum
| Method | Fits | Poor fit |
|---|---|---|
| DCA | Salary surplus; long index plan | Clear undervaluation with cash already segmented |
| Tranches | Elevated valuation, high vol | — |
| Lump sum | Extreme undervaluation + L0 secure | Emotional bottom guessing |
Link to Cycles & macro: reduce DCA pace when valuations stretched; tilt to bonds/cash.
7. Structure example (illustrative only)
| Sleeve | Example |
|---|---|
| Core | 70% broad (split domestic/global) + 20% bond/cash + 10% sector or singles |
| Satellite | Singles or theme ETFs within discipline caps |
Rebalance annually or when drift >5% from target weights.