80-20 Rule in Mutual Fund

Learn about 80-20 rule, a fundamental financial principle that forms the basis of a well-rounded investment portfolio.
EXPLORE FUNDS
80-20 Rule in Mutual Fund
EXPLORE FUNDS
3 min read
30 March 2024

The 80-20 rule, also known as the Pareto principle, is a simple but powerful concept that can help you optimise your investments. It states that 80% of the results come from 20% of the causes. In other words, a small number of factors have a large impact on the outcome.

How does the 80-20 rule work?

The 80-20 rule can be applied to various aspects of life, such as business, productivity, health, and relationships. For example, 80% of your sales may come from 20% of your customers, or 80% of your happiness may come from 20% of your activities. The key is to identify the 20% that matters the most and focus on them.

Similarly, the 80-20 rule can be applied to investing in mutual funds. Mutual funds are pooled investments that invest in a variety of securities, such as stocks, bonds, commodities, etc. They offer diversification, professional management, and convenience to investors. However, not all mutual funds are created equal. Some may perform better than others or suit your goals and risk profile better than others. Therefore, it is important to find the 20% of mutual funds that can deliver 80% of your desired returns.

Importance of the 80-20 rule in investments

The 80-20 rule can help you achieve several benefits in your investments, such as:

  • Simplifying your portfolio: By applying the 80-20 rule, you can reduce the number of mutual funds in your portfolio and focus on the ones that have the highest potential. This can save you time, money, and effort in managing your investments. It can also help you avoid over-diversification, which can dilute your returns and increase your costs.
  • Enhancing your returns: By applying the 80-20 rule, you can allocate more of your capital to the mutual funds that have the best performance and prospects. This can help you maximise your returns and compound your wealth over time. It can also help you avoid under-performing or risky mutual funds that can drag down your portfolio.
  • Aligning your investments with your goals: By applying the 80-20 rule, you can select the mutual funds that match your investment objectives, time horizon, and risk tolerance. This can help you achieve your financial goals faster and more efficiently. It can also help you avoid emotional or impulsive decisions that can harm your investments.

How to implement the 80-20 rule in different scenarios

The 80-20 rule is not a one-size-fits-all formula. It can vary depending on your personal situation and preferences. Here are some examples of how you can implement the 80-20 rule in varying situations:

  • Scenario 1: You are a young and aggressive investor who wants to grow your wealth in the long term. You have a high risk appetite and can tolerate market fluctuations. You can apply the 80-20 rule by investing 80% of your portfolio in equity mutual funds that have a track record of delivering high returns, and 20% in debt mutual funds that can provide stability and income.
  • Scenario 2: You are a middle-aged and moderate investor who wants to balance your growth and income. You have a medium risk appetite and can tolerate moderate market fluctuations. You can apply the 80-20 rule by investing 80% of your portfolio in hybrid mutual funds that invest in a mix of equity and debt securities, and 20% in liquid mutual funds that can provide liquidity and safety.
  • Scenario 3: You are an elderly and conservative investor who wants to preserve your wealth and generate income. You have a low risk appetite and cannot tolerate market fluctuations. You can apply the 80-20 rule by investing 80% of your portfolio in debt mutual funds that invest in high-quality and low-duration securities, and 20% in equity mutual funds that can provide some growth and diversification.

Common ways of using the 80-20 rule for investments

  • By asset class: You can use the 80-20 rule to allocate your portfolio between different asset classes, such as equity, debt, gold, etc. For example, you can invest 80% in equity and 20% in debt, or 80% in debt and 20% in gold, depending on your risk-return profile.
  • By fund category: You can use the 80-20 rule to allocate your portfolio between different fund categories, such as large-cap, mid-cap, small-cap, sectoral, thematic, etc. For example, you can invest 80% in large-cap funds and 20% in mid-cap funds, or 80% in sectoral funds and 20% in thematic funds, depending on your growth potential and diversification needs.
  • By fund performance: You can use the 80-20 rule to allocate your portfolio between different fund performance, such as top-performing, average-performing, and bottom-performing funds. For example, you can invest 80% in top-performing funds and 20% in average-performing funds, or 80% in average-performing funds and 20% in bottom-performing funds, depending on your return expectations and risk appetite.

The 80-20 rule is a powerful concept that can help you optimise your investments in mutual funds. It can help you simplify your portfolio, enhance your returns, and align your investments with your goals. You can apply the 80-20 rule in different scenarios and ways, depending on your personal situation and preferences. However, it is always advisable to consult with a professional financial advisor before making any decisions.

Frequently asked questions

How do you set goals with the 80-20 rule?

The 80-20 rule is a budgeting strategy that allocates 20% of your income to savings and investments, and 80% to expenses.

Is 80-20 a good investment strategy?

The 80-20 rule can be applied to investing in different ways. One way is to allocate 80% of your portfolio to low-risk, diversified assets, such as index funds, and 20% to high-risk, high-reward assets, such as individual stocks or cryptocurrencies. This way, you can balance stability and growth, while limiting your exposure to losses.

Another way is to identify the 20% of stocks or sectors that account for 80% of the market’s returns, and invest in them accordingly. However, this method is more difficult and uncertain, and can net you heavy losses instead.

Related videos

Disclaimer

Bajaj Finance Limited (“BFL”) is a Non-Banking Financial Company carrying the business of acceptance of deposits, providing lending solutions to Retail & Corporate customers, and is a Corporate agent of various insurance Companies. BFL is also registered with the Association of Mutual Funds in India (“AMFI”) as a distributor of third party Mutual Funds (shortly referred as ‘Mutual Funds’).

BFL does NOT:

(i) provide investment advisory services in any manner or form;

(ii) perform risk profiling of the investor;

(iii) carry customized/personalized suitability assessment;

(iv) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.


In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on ‘As-is’ basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme /Offer related documents carefully. The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities. The NAV will inter-alia be exposed to Price / Interest Rate Risk and Credit Risk. Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund. BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other / better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.

Bajaj Finserv Direct Limited, (“BFDL”), a wholly owned subsidiary of Bajaj Finserv Limited (is a Registered with SEBI as an Investment Advisor with Registration no. INA000016083). BFDL enables resident Indian customers to directly invest in third party mutual funds through its online platform. BFDL entered into a referral arrangement with BFL, whereunder, BFL may, without risk or responsibility on its part, refer the resident Indian customers who are interested in placing their investments in Direct Mutual Funds through BFDL online platform. Investment by a person residing outside the territorial jurisdiction of India is not acceptable nor permitted.

Disclaimer on Risk-O-Meter:
Investors are advised before investing to evaluate a scheme not only on the basis of the Product labeling (including the Riskometer) but also on other quantitative and qualitative factors such as performance, portfolio, fund managers, asset manager, etc. and shall also consult their financial advisers, if they are unsure about the suitability of the scheme before investing