May 17, 2012, 12.37 PM | Source: Personalfn.com
The worst phase has been continuing for the investors in the domestic equity markets as well as across the globe.
, PersonalFN | Capital Expertise: Mutual Funds ,Fixed Income
Many investors have seen their portfolio value eroding more as compared to the benchmark indices over the past 1 year and some sitting on huge loses over the past 3 years. But yet they are unable to make out why they incurred a huge loss in their portfolio. Was it a wrong selection of funds or their exposure to wrong asset class?
Well over the next 3 to 5 minutes, you can know how you can make this a better time for your mutual fund investments, and how you can strengthen your mutual funds portfolio in 8 easy steps.
We have always seen that to gain from equity markets, you have to participate into it. Staying on the sidelines can only help you with wealth preservation and may not help you achieve your dreams of wealth creation. We have always advised our investors to continue with their saving habits. And for the new investors, they should start investing via SIP mode.
But your key to long term wealth creation lies in being invested in well diversified equity funds with a superior track record. Moreover, you should invest only in those equity funds that are backed by strong investment systems and process and have a proven and consistent performance track record and preferably invest with a long-term horizon of at least 5 years.
For one who already have a mutual fund portfolio, the first thing you should be doing is to take necessary steps to strengthen your portfolio. To strengthen your portfolio you need to 1st identify the pros and cons in your portfolio and then identify if your portfolio needs a change.
1) diversification: Diversification is the key to success in uncertain market conditions. By diversification we do not say to buy n number of schemes for your portfolio. But 5 to 7 good consistent funds will do the job for you. You should not only seek diversification across schemes, but also across asset class. Don't forget that investors who held exposure to gold and debt schemes in their portfolio are better off in the past year as compared to those who held their entire holdings in equity schemes.
2) Asset Allocation: Your Asset Allocation should be based on your goals, time horizon and risk appetite. You need to identify your financial goals and the time left to each goal and most importantly your risk appetite and accordingly allocate your asset in a fixed proportion. You should also periodically check your asset allocation and if you find a high deviation from your benchmark allocation then you should rebalance it to the benchmarked allocation.
3) Thematic and similar funds should be avoided: You should keep yourself away from thematic and sector funds as they may cost you when the sector is out of favour. And in the conditions like this, you may not be sure on which sector will face the thrashing. Well diversified equity funds are any time a better choice for investors who are looking for long term capital appreciation from equity investments. And you should know the objective of schemes that you hold in your portfolio. It does not make sense to hold multiple schemes with a similar objective and investment style.
4) NFO's should be avoided: NFO’s rarely make any investment sense. They are many times launched to raise fresh funds though the fund house may have an existing similar fund. The NFO might be just an old wine in a new bottle. So it always makes sense to avoid NFO’s as they do not have any track record.
5) Exit losers in your portfolio: You should identify the losers in your portfolio. You must exit funds that have been consistent underperformers as even 1 bad fund can continue to bring down your overall portfolio returns over a long term.
6) Long Term Returns: For new investments, choose your schemes based on long term returns. You should not get carried away with schemes that have come to light only on the basis of short term market movement. Long term performance of at least 3 to 5 years helps ensure that the fund has been tested over multiple market cycles and should be your choice only if it has outpaced its peers and the benchmark index over the long term.
7) Little Gold and Debt exposure is a must in your portfolio: Gold has been a consistent outperformer over the past 3 to 5 years. Even in the past financial year (2011-12) it has been the top performer and Gold ETFs are the best way to hold gold for the benefits they offer compared to physical gold. On the other hand Debt funds in India will continue to be in favour in the current year as RBI has initiated with cutting policy rates after it got inflation under control. So an exposure to Gold ETFs and Debt Funds in your mutual fund portfolio will help you provide strength to your mutual fund portfolio.
8) Take Expert Advice: If you lack the expertise of identifying the right fund in your portfolio, then you should take expert advice to improve your portfolio. Make sure that the expert monitors mutual fund on both quantitative as well as qualitative parameters. While quantitative parameters helps judge the funds past performance, the qualitative parameters helps ensure that the fund is consistent and fundamentally strong to achieve that performance in future as well. We at PersonalFN make sure to test mutual funds on various parameters within both quantitative as well as qualitative parameters.
PersonalFN is a Mumbai based Financial Planning and Mutual Fund Research Firm.
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