The coronavirus pandemic coupled with the upheaval in the stock market has forced many to re-evaluate their mutual fund investments. Continued investments in mutual funds is the key to earning high returns though plunging net asset values (NAVs) and volatility in the market in these unprecedented times have changed people’s outlook towards debt and hybrid funds considering their relative stability over equities.
That investments must be aligned to one’s goals is the mantra that guides every successful investor. Allocate, check, adjust, churn and re-adjust are simple steps to do to ensure that every investment you make is in tune with your short-term and long-term goals. Portfolio diversification is not a one-time task but involves a series of steps that could be repetitive. Here’s where you start.
If you are a long-term investor, consider investing in mutual funds for returns that beat inflation and help you earn more. Adhil Shetty, CEO, BankBazaar.com, an online marketplace for financial products, said, “Mutual funds are a good investment if you have at least three years to remain invested. If you are investing in children’s education, a large-cap fund or a blue-chip fund would be a good idea as these are less risky and provide returns to the tune of 12-18%. The chances of capital erosion in these funds are also less. The risk-averse can also consider debt-oriented hybrid funds that earn usually between 8-12% depending on the fund.” Many people also invest in secure government instruments that earn returns more than the inflation rate.
Choose your investments: Making the right pick of assets is an arduous decision and warrants a correct understanding of financial goals and risk tolerance. Mutual funds performing well under specific market conditions may not deliver similar results when the economy is in doldrums. The epidemic has shifted the focus from equity investments to mixed investments including debt instruments and fixed income schemes. Equity investments fall into different categories including investments in stocks/shares, equity mutual funds, arbitrage schemes and real estate funds. Debt instruments include bonds issued by companies, municipalities and various government sectors The fixed income schemes are mostly bank deposits including savings accounts and money invested in deposits promising fixed returns.
Jayesh Faria, associate director, Motilal Oswal Private Wealth Management, an investment and fund management company, said, “Do detailed personal risk profiling activity and arrive at ideal asset allocation keeping circumstances and requirements in mind. Roughly 80% of the strategic portfolio must be allocated to stay invested all the time. The balance 20% can be looked at tactically to take the opportunity of market volatility.” The open-ended nature of mutual funds helps to minimize investors’ risk quotient as concerned fund managers allocate the pooled amount into multiple stocks depending on the fund subscription by the investors.
Mere diversification of funds between the market and those earning fixed returns is not enough. You must also know how to diversify your allocations within your equity fund instruments depending on funds availability and understanding of risk versus returns. Also, holding several mutual funds incessantly without looking at their composition is tomfoolery. Instead, the focus must be on the diversification of mutual funds according to their market cap. You need to diversify across different fund categories such as flexicap, midcap, small-cap, and large & midcap. Even in debt instruments, pay attention to a proper mix of long-duration, medium duration, and short-term debt funds for better results.
Lump sum or SIPs? The decision to invest a definite amount in mutual funds or pay for mutual fund investments through small instalments has sent many people into a quandary.
Prashant Sawant, co-founder, Catalyst Wealth, a wealth management company, said, “SIP is a good option for the current volatile market. Since it is a disciplined investment plan it helps reduce the propensity to market fluctuations, cost averaging and render significant wealth creation in the long run.” Many investors are unable to decide if they must invest regularly in small chunks or wait for the right time to put their money in the market in a lump sum. Speaking on factors that guide investment making decisions in lump sum or SIPs, Dr Joseph Thomas, Head of Research, Emkay Wealth Management, a financial services firm, says, “In a country like India where retail participation in mutual funds is growing over the decades, SIP has served the purpose of giving access to funds for such investors even with very small monthly investments that are very much within the reach of the common man. Also, this mode is important is because one need not be bothered about the day-to-day happenings in the market. It is a matter of common experience that in a highly bullish market and one-way movement, a lump sum will provide you with better returns.”
Diversification helps to bear the brunt of sudden bull market corrections or gain from the bear market rallies. The equity stock market does not promise linear returns, and hence, it helps to enter the market in a phased manner through small and regular investments over a long period.
Monitor diversifications: Most people forget to check the performance of their investment portfolio. Once you have decided your investment choices and diversified accordingly, it is important to monitor their performance and plan the right step too. This is because some mutual funds may not perform as per your expectations. Their ineffectiveness must translate to relegating them to the lowest share of the investment portfolio while more money can be allocated to the more stable and outperforming ones. Check for the funds’ annual returns, growth in dividend income and asset allocation to assess your funds’ performance.
Personal Finance is a weekly feature that aims to provide our readers pertinent and helpful financial information
