In an interview to CNBC-TV18, Hemant Rustagi, CEO, Wiseinvest Advisors says the key to investing is having the right approach. When an investor is looking to build his portfolio, he should consider getting the balance right on risk and reward. “It is not always necessary that when you invest aggressively you will end up earning higher returns. So it is important to have a balanced portfolio which works for you,” he says.
Below is an edited transcript of his interview to CNBC-TV18. Watch the accompanying video for more.
Q: An investor can invest Rs 40,000 per month. How does he allocate his money? At present, he has invested in two SIPs - HDFC Balance Growth and HDFC Top 200 by doing an SIP of Rs 5,000 per month. The time horizon that he is looking for is two to three years and the return that he is looking for is around 20% plus on annual return.
A: When you have a time horizon of two to three years and you are looking to earn annualized return of around 20% or more than that, I would like to tell you that investing is all about getting the right balance between risk and reward. It is not always necessary that when you invest aggressively you will end up earning higher returns. It’s very important to create a portfolio which has the right balance between risk and reward.
For a two-year time horizon especially if you are investing on a monthly basis, you have a time horizon of less than one year. In that case, I don’t think you can really make your portfolio very aggressive. I don’t think that will be advisable. In that case the investor can look at maybe some debt oriented hybrid funds. You have monthly income plans in that category or you can look at HDFC MIP Long Term or Reliance MIP but if you can extend your time horizon a little bit more, maybe another four or five years then you can have a portfolio wherein you can look at two-thirds of your money going into equity oriented balance fund and one maybe pure largecap oriented equity fund.
This investor already has two funds which are both high quality funds, HDFC Top 200 which is primarily a largecap oriented fund and HDFC Balance which is again a quality balance fund. Another balance fund that you can look at in that category is Canara Robeco. Keep your focus on your time horizon and then create the portfolio for yourself.
As the investor is 32-years old, it is time for him to establish his long-term goals. It’s important because when you look at your long-term goals especially if you are looking to create a corpus for your children’s education or your own retirement, generally we require a large corpus; in that case it’s very important that you start investing early.
Because only then the power of compounding can work in your favor, so if the investor does that I think it will be good for him. Making ad-hoc investment decisions is not always good. I would advice the investor to really establish his goals and then start working on that.
Q: An investor wants to invest Rs 15,000 per month and his goal is to make Rs 1.2 crore after 10 years. He has a term insurance from Aegon Religare that is at Rs 70 lakh and another is with ICICI Prudential with an annual premium of Rs 50,000, so he has a cover of around Rs 5 lakh.
A: Here the good thing is that he has a time horizon of around 10 years. So for a time horizon of 10 years you can definitely afford to make your portfolio a little aggressive which means that he can actually consider investing in pure equity funds. But the important thing to remember is that equity as an asset class is aggressive. One doesn’t have to really make the portfolio very aggressive by investing predominantly into one sector, thematic or mid or smallcap funds. One should be looking at well diversified equity funds which are what he should do.
The second important thing is he will be investing money on a monthly basis which means that a disciplined approach will not only take care of the volatility in the market but may also turn it to his advantage over a period of time. He has a target of around Rs 1.20 crore over a period of 10 years. If he assumes an annualized return of 10%, I think he will have to invest around Rs 54,000.
It’s quite evident that the money that he has already invested plus what he wants to invest now will not be enough to create this kind of corpus. So he needs to look at a couple of options that he has. The first one is he needs to increase his investments substantially and as soon as possible. The second is to revise his target and the third one is to extend his time horizon which I believe is the most practical one because if he extends his time horizon by another maybe four or five years then I think with the kind of money that he is investing, he can at least hope to reach somewhere near to that corpus.
He has some equity funds, so I would say that I don’t think he needs to really add more funds to that. Two or three funds from the existing portfolio that he has he can look at. One is HDFC Top 200, ICICI Discovery and ICICI Focus - in these three funds he can invest Rs 5,000 each and if he increases his investment over a period of time he can hope to reach close to his corpus.