We are all unique. We all believe in this and want to leave our stamp of individuality on all things we do. But, surprisingly, this does not extend to our investment strategy.
We somehow think that, what works for our friends / colleagues, would work for us too. That’s a major mistake. This kind of thinking stems from the thinking that one needs to invest money in instruments, which offer the best returns at that point. We are all chasing returns.
But, what about our goals? We want to go somewhere over time and we are not paying any attention to that. We tend to believe that if we invest in high yielding instruments, our goals will be taken care. We tend to believe that we have the capacity to spot these as they become available and also move back into higher yielding instruments, when the returns from the current ones taper off. Also, when we chase returns, we tend to ignore other aspects like duration, risk, taxes, liquidity etc. and this is where the problem lies. For example many people are investing now in property, due to the potential for good returns, ignoring the risks associated with it, the long duration for which it is to be held, the loan they need to take-on and it’s illiquid nature. Many also believe in their timing abilities, to weave in and out of investment options. It looks easy, but is difficult to pull off.
For achieving the goals, we may need to invest in a certain mix and keep the investments for a certain period. Investments can bear fruit, over time. Mutual fund investments are decided based on how it has performed in the recent past or how many stars it has got. Those may be good for a start. But to choose a good mutual fund portfolio, one needs to think through the goals and how we propose to achieve them. Let us take an example.
Mahesh is 35 years old, married and has two children. He is expected to work till 60. His wife is a home maker. His children have just started to go to school and their college education is 13-15 years away. His retirement is 25 years away. He wants to buy a home later in life, but prefers to live in a rented place as he wants to retain the flexibility to move unhindered to pursue his career. He puts that as 10 years away. He already has a car. He will change the current car in three years.
He is predominantly investing through Equity & Debt Mutual fund schemes as his post tax income is much better that way. Since he is 25 years away and does not mind being aggressive, the asset allocation could be 70% towards equity assets and rest towards debt assets. This could be the overall asset allocation.
Among Equity assets, he could look to invest about 60% in large cap oriented schemes. These include large cap funds, large cap oriented funds, Index funds mirroring Sensex/ Nifty. Mid & small cap funds, thematic and sectoral funds could constitute 30%. The balance 10% can be invested in International funds, commodity funds & precious metal ETFs.
As far as debt funds are concerned, we need to bifurcate between Long & short duration funds. In his case, since the investments are for long-term, 70-80% can be in medium to long-term oriented funds and the rest can be in short to ultra-short term oriented funds.
Among the medium to long-term oriented funds, for some portion, he could look at dynamically managed funds where the fund manager would manage the duration of the investments based on market conditions. Some of it can be invested in accrual portfolios, where the strategy is buy and hold and the expense ratio is low. FMPs are one such, which have buy and hold portfolios, that would be a good option. For Mahesh, he could also look at Gilt funds with a long-term view. Short-term funds would provide liquidity when needed. This and ultra-short-term funds can be used for provisions, liquidity, contingency funding and the like.
What we have suggested for Mahesh is unique to him. For him to progress towards his goals, the asset allocation needs to be maintained. There can be tactical changes which can be made, depending on the market conditions (like taking a 5-10% more exposure in debt in a period where the equity is in a prolonged downturn). But this allocation will revert back again to the suggested allocation, over time. The basic asset allocation will change only if it is warranted, due to changes in the client situation. Else, changing that to accommodate some asset class which is apparently doing well today, will disturb the fine balance achieved in one’s portfolio, after proper thought.
Putting together a proper portfolio is important. Sticking to it, is even more important. Random disinvestments of one’s portfolio to indulge in whims of investing in fancy assets, is a recipe for disaster. Instead of helping one’s cause, it will torpedo one’s future.
