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BW Businessworld

Get The Mix Right

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Successful investing solicits discipline, investment confidence and right investment choices. While most investors in capital markets have the first two, choosing the right investments is the tricky part. Professional investors take up the task themselves by selecting the equity stocks, while retail investors, who do not have the required expertise, leave it to mutual funds. Unfortunately, the task doesn’t end there for retail investors. Selecting the right mutual funds also requires research.

Irrespective of the category of funds you are looking at, consistency in returns is what you should seek. Look out for funds that have a history of outperformance. Look for funds that have outperformed their benchmark and peer average performance consistently over the last three years.  If there are too many funds to choose from, look for five years and seven years of history. By consistency, I mean, beating the benchmarks when markets rally, and defending portfolio value better when markets fall, regularly. One can measure this by the percentage change in net asset values (NAV) between periods through various statistics such as compound annual growth rate (CAGR), rolling returns, etc.

One should also look at the fund’s risk. Risk of a fund can be measured by the variation in its NAV on average. Statistics such as standard deviation and variation would help you with that. These statistics are freely available on investor-oriented websites such as Value Research, Morningstar and Moneycontrol. You should avoid funds that invest too much of their portfolio in a particular stock/ sector/ instrument. In debt funds, avoid those focusing too much on a particular bond, or in bonds with low credit rating.

The phrase is true even for mutual funds. Within equity funds there are funds that react differently to different market events. So when markets rally, there would be funds that would rise more than benchmarks, some would rally but not as much as benchmarks. Ditto when markets fall. The sensitivity to markets is called beta. Take the help of a qualified financial planner to help you choose funds with different beta levels so when markets correct sharply, there would be some funds in your portfolio that would hold and protect the portfolio’s overall market value. 

Create a suitable mix of equity, debt, liquid and gold mutual funds to match your personal investment goals. When you have enough time to give to your investments, like more than seven years, your portfolio should hold a higher proportion of its assets in equity funds vis-à-vis debt funds. Portfolios for tenures lesser than five-seven years should ideally be overweight on fixed-income instruments to provide regular income and limit overall portfolio risk.  Do not avoid liquid and gold allocation totally. These two should jointly ideally constitute at least 10 per cent of your overall portfolio.

Limit the number of funds in your portfolio to five-six at the most. This is because, as the number of funds increases, the effect of diversification due to different beta as discussed above, decreases. There would be some stocks that would be common between two or more funds, thereby increasing the overall portfolio’s concentration in those stocks. 

The author is Associate fund manager, Bonanza Portfolio

(This story was published in BW | Businessworld Issue Dated 20-03-2015)


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magazine mutual fund neeraj thakur magazine 20 april 2015