A smart investor finds it easy to invest when the market is either flat or falling.
The time she spends in the market is very much in her control. In fact, she can use the current market to build a good mutual fund portfolio.
In such a market, some try out the ‘core and satellite’ approach, a time-tested method of portfolio construction. In this, the investor creates a core-holding that is expected to offer returns in sync with the market and the rest is put into some alternative investments having a low correlation with the core investment.
“Financial goals, time horizon and risk appetite should decide the allocation to a core and satellite portfolio,” says Sumeet Vaid, founder & MD of Ffreedom Financial Planners. Generally, the core component should account for 60-80% of the portfolio. In the classical sense, the broader market is represented by index funds. But, given the high scope for outperformance over the index by the diversified equity funds, one can invest in quality diversified equity funds. “An average MF investor lacks the time and expertise to decide on a sector which will do well.
Given the dynamic scenario in various sectors, it makes sense to have a diversified equity fund as part of the core holdings, as the fund manager can take an informed decision that benefits the investors,” says Nikhil Naik, managing director of Naik Wealth, a Mumbai- based investment advisory firm.
Depending on the risk appetite, you can choose between index funds and diversified equity funds. A risk-averse investor may go in for index funds whereas one with a propensity for risk could opt for diversified equity funds. A point to note is that no mutual fund scheme here should get more than 20% of your money. While deciding on the schemes, you may consider past returns, fund pedigree, fund management team and the fund management style, among other factors. The core portfolio offers you returns in sync with the broader market returns.
On the other hand, the ‘satellite’ holdings are expected to add quality and returns to your overall portfolio. Here you need to incorporate investment opportunities that are ‘not strictly correlated’ with your core holdings. Mutual funds that invest in alternate assets or geographical locations make eminent sense for this portion of the portfolio. One can also consider different investment styles. Sector funds, though selectively, also make it to the satellite portfolio of investors. No investment in the satellite portfolio should occupy more than 10% of the entire portfolio.
Consider a case where you have invested in Indian equities. That must not be the best-performing market in the world. There are other growth stories worldwide, beyond India and China. One can consider ING Latin America Fund, an equity mutual fund scheme that invests in a fund dedicated to invest in Latin American markets. This may make a meaningful diversification, given the low correlation with our markets in the long run. However, considering there are geopolictical risks associated with investments into these markets, one should limit the exposure in funds which invest into these markets.
If you are a professional working in a particular sector and are well-versed with the dynamics of the business, you may be better off taking a sectoral plunge. A project manager with an IT company may consider an IT fund. Within the category, the investor must find a solution that better suits his view.
Investment in Franklin Infotech Fund will offer an exposure to the sector, but will remain focused on large-cap IT, with more than half the assets invested in Infosys Technologies. On the other hand, DSPBR Technology.com fund will offer a more diversified portfolio. Both have their own risk-and-reward matrices and can bring a big change in your overall portfolio returns if a careful entry and exit can be timed as a satellite holding in your portfolio.
“Passionate investors prefer to include schemes that invest on quantitative parameters. ‘Ethical’ or ‘socially responsible’ offerings also make it to some investors’ radar,” says a financial planner with a Mumbai-based bank. A fund that invests on dividend yield parameters is also considered by some investors with low-risk appetite.
While building a portfolio, you should invest in systematic investment plans (SIPs) and the amount should be decided taking into account accumulated money with you and the anticipated monthly investible money inflows. “Timely rebalancing of the portfolio is important to ensure success of such a strategy,” says Sumeet Vaid.
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