What are the things to consider while choosing the schemes to invest in, while constructing a MF portfolio.
For a normal investor, investing their money has mostly been just a matter of doing what they have been doing in the past, like investing in FDs, NSCs, PPF etc. Lately, many people have been investing in Mutual Fund schemes too. Many among them have understood the significance of SIPs and are staunch devotees who pay their monthly obeisance.
But then, picking up the right set of schemes for investments is a challenge. Many do not see it that way. They just pick up what their friend / colleague has gone in for… what is being currently advertised. A favourite among investors is the NFO route. Even after a blizzard of articles specifically debunking the Rs.10 advantage in a NFO and highlighting the negatives of investing in a new scheme without a performance track record and possibly a new fund manager, investors continue to patronize NFOs.
So, how does one construct a proper MF portfolio? Let me offer some pointers.
Fund house filter – There are some fund houses which have built expertise in equity fund management/ debt fund management etc. Go to the experts and you would have won half the battle. AMCs which have a proven track record in equity asset management would be the fund houses to go to, for equity funds. Such fund houses would have the capacity to manage equity assets better than most, due to their better experienced fund managers, their processes & systems. There are some fund houses with niche capabilities like global investing or commodity stock investing etc. Again the same filter needs to be applied before zeroing in, on the fund house.
Fund manager filter - Fund managers play a major role in the scheme performance. Though there are systems and processes that tend to minimize the individualistic nature of fund management, fund managers skill is essential for funds to perform well. You will be able to see that in any category of schemes… you see a major difference in performance of schemes in the same category over different cycles of the market. One would see that some schemes have consistently outperformed the corresponding index and have beaten the category average, over various time frames. That’s fund manager’s skill working for you.
Performance filter - There are funds which have consistently performed over time and there are others which have delivered stellar performances, from time to time. While constructing a portfolio, one should look for consistency in performance rather than sudden bursts in the charts. The former is far more desirable and is achieved through proper selection processes, conviction, understanding and correct judgement at various points. Also, one should choose funds which have at least a 3 year performance history. This will help in validating if the fund is worthwhile to consider investing.
Portfolio construction - This should be a carefully thought about process. An investor needs to keep in mind their goals and their requirements for cashflows, over time. They should also consider their risk taking ability which would consequently dictate the kind of portfolio that one should construct. The portfolios for different people are hence going to be different. But broad principles apply.
The portfolio stability will need to be ensured through a mix of Large cap funds, Index funds & equity oriented balanced funds. Even a debt oriented fund with a dash of equity, like in the case of MIPs would be suitable here. This is to be the bedrock of the portfolio for most people. How much of large caps and how much of index funds, will depend on the amount of risk one is willing to take for the sake of returns.
Over this, there can be a satellite portfolio comprising of some aggressive funds like midcap & smallcap funds, value & opportunistic funds, all cap funds etc. The satellite portfolio can also comprise of thematic and sector funds. However, one needs to think through why a thematic / sectoral fund is required in their portfolio. A banking sector fund may be superfluous in a portfolio today as most schemes anyway have exposures to Finance sector anywhere between 12-20%. Some sectors like pharma, media and entertainment are extremely vast sectors and exposures in them is best achieved through a sectoral fund. Such sectors, if they make sense in the portfolio, can be invested in through sectoral funds. Again, the allocations towards various categories is best left to individual discretion and their expectations for the future.
In one’s portfolio, there could be a need for commodity, gold & global equity exposure too, especially if the portfolio is large and the need to diversify the portfolio is acute. In such a case, choosing appropriate schemes could add value to the portfolio. These should not be included in the portfolio as a fad.
When choosing schemes to invest one can broadly allocate about 10% in a scheme, going up to 15% in select cases. The fund house allocation should be not more than 20% among all the chosen schemes, going up to 30% in select cases. Allocation in equity schemes should be across time frames. SIP ensures that. Lumpsum investments also can be invested through Systematic Transfer, after investing in debt funds to tide over the timing risk.
That is not too hard to do, is that?
Article by Suresh Sadagopan ; Published in Business Standard on 19/6/2011
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