- Choose mutual funds that are not only among the best in the category and sub-category but even assess which are the best suited for you.
- Note that every category and sub-category of the mutual fund scheme has its distinct risk-return traits, which you must carefully assess before investing.
- If you have been SIP-ping in some of the best funds, do not commit the mistake of stopping or discontinuing your SIPs petrified by market volatility
RINA NATHANI
Mutual funds are a potent avenue for wealth generation ––Mutual Funds Sahi Hai! But it is important to assess whether you are following a prudent approach or not.
Many times, investors select schemes perceiving the amount of assets managed by fund house, go by a star fund manager, the past returns (which are not necessarily indicative of how future returns), and follow what the next-door neighbour, friends, relatives and/or colleagues do with their investments. But this is not a very prudent approach.
You ought to be thoughtful in your investment approach. Choose mutual funds that are not only among the best in the category and sub-category but even assess which are the best suited for you. You see, there is no such thing as a one-size-fits-all approach; investing is an individualistic exercise.
Here are some tips to make sensible investments in mutual funds:
Define your financial goal and time horizon
“A man without a goal is like a ship without a rudder,” said Thomas Carlyle, a Scottish philosopher.
We all have some financial goals such as ––buying a dream home, a car, a vacation, planning for children’s higher education needs, their wedding expenses, and our retirement. So, align investments with these financial goals and the time in hand to achieve them rather than investing in an ad hoc manner. If this crucial task is overlooked, you may fall short of the finances when the goal befalls.
Recognise your risk profile
Your current age, financial circumstances, insurance cover, investment objective, personal experiences, risk-return expectations, and time horizon to achieve the goals are some of the factors that determine your risk profile (very aggressive, aggressive, moderate, or conservative).
When you add schemes, it is important to add those that match your risk profile. For instance, if you have a very high-risk appetite and an investment time horizon of 5-7 years, a good equity scheme may be appropriate for investment and potential wealth generation. On the other hand, if your risk profile is very low and the time horizon is less than 3 years, you ought to avoid equity funds and instead be considering liquid funds and short-duration debt funds.
Note that every category and sub-category of the mutual fund scheme has its distinct risk-return traits, which you must carefully assess before investing.
Follow a sensible asset allocation model
The fact is, not all asset classes move in the same direction always. In certain years equities have rewarded investors handsomely, and in years when equities encountered headwinds due to macroeconomic uncertainty and rising interest rates; gold, debt and fixed-income instruments have proved to be saviours.
Hence, a sensible Asset Allocation model must be followed. Ideally, it should be as per your risk profile and the time in hand to achieve the envisioned financial goals.
The other option is to broadly follow the tried and tested 12-20-80 Asset Allocation model, which is a simple solution for all your investment needs. This shall potentially offer your portfolio a correct mix of stability, growth, and protection.
Diversify within an asset class
Apart from following suitable asset allocation, diversify wisely within an asset class. For example, within equity mutual funds you may follow a Core & Satellite approach, wherein a Large-cap Fund, Flexi-cap Fund, and Value Fund may be added to the ‘Core’ portfolio from a stability standpoint, while the ‘Satellite’ portion (a small composition of the overall equity fund portfolio) may comprise aggressive funds such as Mid-cap Funds, Small-cap Funds and/or Focused Funds. ELSS may also be approached for taxsaving. That said, care should be taken not to over-diversify, as too much of anything is good for nothing! Avoid holding. In all avoid holdingmore than 8-10 mutual fund schemes in your portfolio.
Preferably take the SIP route when investing in equity mutual funds
SIP is a worthy mode of investing particularly in equity mutual funds and an effective medium for goal planning. SIPs help you mitigate the volatility of the equity market. The unique feature of SIP is the Rupee Cost Averaging. In a market correction, you end up buying more units and buy less when the market is high. If you have been SIP-ping in some of the best funds, do not commit the mistake of stopping or discontinuing your SIPs petrified by market volatility. It could put brakes on the power of compounding and then accomplishing important financial goals may be a challenge.
Sensibly select the best suitable mutual fund schemes and periodically review the portfolio
Select the mutual fund schemes evaluating a host of quantitative parameters (viz. returns across time periods, performance across market phases, risk ratios, the expense ratio)and qualitative ones (viz. portfolio characteristics, the credentials of the fund management team, and the overall efficiency of the mutual fund house in managing investors’ hard-earned money)––not just recent returns. This would help you gauge the risk-return potential of a mutual fund scheme. Besides, understanding the investment philosophy, processes and systems of the mutual fund house is useful.
After investing in the best schemes also periodically (once in six months) review the portfolio. Do not merely follow a buy-and-forget approach. A portfolio review shall help cull out underperforming schemes (after giving them time to prove their mettle), replace them with suitable options (as per your personal risk profile and time horizon), consolidate and rebalance the portfolio, ensure optimal portfolio structuring, plus make sure you are on track to achieve the envisioned financial goals. If you are unsure about your investment portfolio or want to seek professional help to review and rebalance it, reach out to a SEBI-registered investment advisor.
Follow the aforesaid valuable tips so that your wealth creation journey is blissful and reap financial success.
The author of this article Rina Nathani is the Chief Business Officer of Quantum AMC
- Risk Factors: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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