MF portfolio: Diversify and factor in risk appetite

The equity markets are at their volatile best and it is difficult to predict the direction of the markets amidst the ongoing results season. Robust industrial production numbers backed by strong global cues led to a major upsurge in the markets last week.

While the markets have been on a roll since March this year and are continuing to scale up, investing at the current levels has become risky for investors who did not enter earlier.

For an average investor, who does not have the time or the inclination to track the movements of the markets, investing in stocks directly could be risky. A direct equity portfolio requires constant attention, or else the opportunity to exit from losing investments in time or book profits on those performing well, may be missed.

For such investors, investing in equity markets through the mutual fund route may be a better strategy.

While the burden of managing the stocks is passed on to a fund manager in a mutual fund, the selection of the right funds for the portfolio remains the problem of the investor. Choosing the right funds based on your risk appetite, time horizon for investment and returns expectation is extremely important.

The method of investing in mutual funds also assumes importance depending on the nature of the markets. Investments in mutual funds can be made in lump sum or through the systematic investment route.

In the current market conditions, making lump sum investments may not be a good idea considering the fact that the markets have run up very fast and investors may encounter a correction. Hence, in these times, making investments using the systematic investment plan (SIP) or systematic transfer plan (STP) is advisable.

Here are some pointers for investors in mutual funds to build a robust portfolio:

Portfolio allocation:

As a thumb rule, 100 minus your age is the amount which should be invested in equity. However, risk appetite and resources are important factors to be considered also. Generally, it is seen that risk-taking ability goes down as you become older since capital preservation takes precedence over capital appreciation.

Portfolio size:

While building a mutual fund portfolio, it is important to remember that even five funds can give the desired level of diversification. So, there is no need to hold a large number of funds. In any case, an individual should not hold more than 10 funds, or else it becomes extremely difficult to monitor.

Designing the portfolio:

The base of a mutual fund portfolio should be built with diversified mutual funds. Allocation to the base should be around 50 percent in not more than 3-4 funds. Diversified funds can invest across sectors and hence can move swiftly across different stocks when the tide turns. For those with a medium risk appetite, balanced funds which invest in equity and debt can form the base of the portfolio.
Once the base is built, a high risk investor can add a good large-cap and mid-cap fund to the portfolio. Sector funds and theme funds are highest in risk and best avoided unless you can monitor these funds regularly to identify opportunities for profit-booking. Investors with a low risk appetite can invest in debt funds. In the current interest rate scenario, keep away from income funds and long-term debt funds since interest rates are expected to harden.

Selection of funds:

Risk-adjusted returns, comparison with benchmark, consistency of performance, fund manager's performance, costs and reputation of the fund house are some of the factors to be considered in selection of a fund. The selected fund should be in existence for at least five years to ensure that it has seen different market cycles. Avoid new fund offers since they have no history of performance.

In the current market conditions, investors would do well to stagger their investments or use the systematic investment facility to invest for the long term. You must review your portfolio performance at least twice a year to ensure that the investments are growing as desired and weed out non-performers after monitoring them for at least a year.

Source: http://economictimes.indiatimes.com/articleshow/5158705.cms?flstry=1