Are Your Eq­uity Fund In­vest­ments On The Right Track?

Dalal Street Investment Journal - - EXPERT SPEAK -

The stock mar­ket per­for­mance over the last one year or so has en­cour­aged an in­creas­ing num­ber of in­vestors to in­clude eq­uity funds in their port­fo­lio. This fact is clearly ev­i­dent from money be­ing mo­bi­lized by mu­tual funds from do­mes­tic in­vestors. It is heart­en­ing to see most in­vestors tak­ing SIP route to in­vest in eq­uity funds. It is a proven fact that a sys­tem­atic ap­proach al­lows in­vestors to avoid com­mit­ting a large amount at a par­tic­u­lar mar­ket level. In fact, in­vestors ben­e­fit from “av­er­ag­ing” as they get to in­vest in the stock mar­ket through well-de­signed port­fo­lios by pro­fes­sional fund man­agers. More­over, this dis­ci­plined ap­proach en­sures that in­vestors get into the habit of keep­ing some money aside for in­vest­ment at a pre-de­fined in­ter­val of, say, on a monthly ba­sis, rather than in­vest­ing what­ever is left on and off. Sim­ply put, a dis­ci­plined ap­proach elim­i­nates un­cer­tainty from in­vestor’s in­vest­ment process.

Al­though the num­ber of in­vestors in­vest­ing in mu­tual funds has swelled in re­cent years, a large sec­tion of In­dian in­vestors has stayed away from this won­der­ful in­vest­ment ve­hi­cle, thereby com­pro­mis­ing their fi­nan­cial fu­ture. Then, there are in­vestors who in­vest with a clearly de­fined time hori­zon in eq­uity and eq­uity-ori­ented funds, but get tempted to ei­ther re­duce their ex­po­sure to this as­set class or exit com­pletely ev­ery

time the mar­ket turns volatile.

As is ev­i­dent, the lack of clar­ity on time hori­zon and volatile na­ture of the stock mar­ket cre­ates cer­tain dilem­mas in the minds of in­vestors. No won­der, they of­ten feel com­pelled to make hap­haz­ard de­ci­sions. In­vestors must know that volatil­ity is a nat­u­ral phe­nom­e­non in the stock mar­ket and hence they must be pre­pared to stay in­vested dur­ing these volatile pe­ri­ods to ben­e­fit from true po­ten­tial of this as­set class that can help them earn pos­i­tive real rate of re­turn, i.e. gross re­turns mi­nus taxes and in­fla­tion over the longer term. If you have been a lit­tle in­de­ci­sive about your in­vest­ments in eq­uity funds, here is what can help you be­come a bet­ter in­vestor.


In the cur­rent mar­ket sit­u­a­tion, there is al­ways a temp­ta­tion to in­crease al­lo­ca­tion to eq­uity funds. How­ever, de­ci­sions made with in­tent to time the mar­ket can back­fire as sev­eral do­mes­tic and global fac­tors keep af­fect­ing the mood of the mar­ket over short and medium term. There­fore, rather than al­low­ing mar­ket con­di­tions to de­cide your in­vest­ments, you must fol­low an as­set al­lo­ca­tion strat­egy. The right way to de­cide your as­set al­lo­ca­tion would be to fol­low a goal-based in­vest­ment process, wherein your time hori­zon and in­vest­ment goals be­come the main con­sid­er­a­tions for de­cid­ing how much should go into eq­uity and how much into debt.

While debt funds al­low you to earn higher post-tax re­turns than tra­di­tional op­tions like fixed de­posits and small sav­ings schemes, eq­uity and eq­ui­ty­con­sid­er­ing ori­ented funds al­low you to stay ahead of in­fla­tion over the long-term. Re­mem­ber, a well-de­fined time hori­zon al­lows you to han­dle mar­ket volatil­ity in a much bet­ter way as you don’t get tempted to take abrupt in­vest­ment de­ci­sions.


that the stock mar­ket looks poised for a sus­tained rally, it is cer­tainly the right time for in­vestors to have a close look at per­for­mance and port­fo­lio com­po­si­tion of eq­uity funds in their port­fo­lios. It is also the right time to re­bal­ance the ex­po­sure to dif­fer­ent seg­ments of the mar­ket, i.e. large, mid and small-cap stocks. While the re­cent cor­rec­tion in the mid-cap seg­ment pro­vides an op­por­tu­nity to in­crease the al­lo­ca­tion to this seg­ment for those who are un­der-weight, it is also time to pare ex­po­sure for those who have been in­vest­ing heav­ily into this seg­ment in the past cou­ple of years.

Broadly speak­ing, a long-term in­vestor should have around 30-40 per cent ex­po­sure to mid and small caps. Out of the to­tal al­lo­ca­tion to these seg­ments, around 70-80 per cent should be in­vested in mid-caps and the rest in small-caps. Sim­ply put, don’t look for ex­cite­ment while in­vest­ing in this as­set class. If you don’t feel con­fi­dent about mak­ing the right de­ci­sions, you must al­low the pro­fes­sion­als to man­age your port­fo­lio.

To sum it up, it is im­por­tant not to get car­ried away by the eu­pho­ria in the mar­ket. At the same time, for a dis­ci­plined long-term in­vestor, there are am­ple op­por­tu­ni­ties to ben­e­fit from the stock mar­ket’s new-found mo­men­tum.

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