How to build a mutual fund portfolio that can weather all market storms
How to build a mutual fund portfolio that can weather all market storms.
The stock markets are volatile and can go either way. Companies, in the middle of the result season, are reporting all-round pressure. In such a situation, it is normal for mutual fund investors to wonder if they should change their strategy. While a periodic review of investments is often advised and is fine, financial advisors say investors should build a portfolio that can give good returns even in the toughest of times.
"Ups and downs do happen in economies and markets. One's portfolio should be capable of sailing through such conditions easily," says Sudhakar Ramasubramanian, Managing Director, Aditya Birla Money.
Portfolios designed after risk profi ling and those in line with the investor's long-term goals may not face turbulence, he adds Gaurav Mashruwala, a certifi ed fi nancial planner, says investors should not alter their basic strategy based on market conditions. However, they could modify their portfolios based on regulatory or other developments. For instance, they should be on the lookout for new products and the emergence of new industries. Or, the market regulator may permit investment in a global index.
Stick to your plan
"Investors should build a well-rounded portfolio keeping in mind the infl ation rate and real returns," says Harshendu Bindal, President, Franklin Templeton Investments (India). From a fi veyear perspective, they can invest 75 per cent equity allocation in diversifi ed or large-cap funds and the rest in sector or thematic funds, he adds. They can also either buy stocks at the current low valuations, or go for systematic investing to lower the impact of volatility. Experts recommend the latter as large-cap diversifi ed funds are like defensive stocks which outperform other assets in the long run.
The top 10 diversifi ed large-cap equity funds have given a compounded average annual return of 29 per cent as compared to the Bombay Stock Exchange's 18 per cent, between September 2001 and October 2011.
In the last fi ve years, defensive sectors such as pharmaceutical and fast moving consumer goods, or FMCG, have outperformed the market. FMCG and health care funds have delivered average returns of 15 per cent to 22 per cent, respectively, as compared to seven per cent by largecap equity funds.
Should investors increase exposure to these sectors? "During uncertainty, defensive sectors do come into prominence, but it is important to remember that they have limited importance for the overall portfolio," says Ramasubramanian. "You may marginally increase exposure to defensive themes, but these sectors also move down with the market."
"In a growing economy like India, growth sectors are likely to give good returns over the medium to long term," says Bindal. The focus should be on investment objective rather than short-term market trends. "Defensive sectors may outperform over the next six months. However, their performance may even out over one or two years," says Anil Rego, CEO, Right Horizons, a fi nancial planning fi rm. Sector-based funds can be the satellite part of a portfolio.
However, their performance needs to be tracked closely as most people are unable to exit such funds on time, says Rego.
Investors have the choice of global funds offered by Indian asset management companies, or AMCs. These are typically "fund of funds" or feeder funds that invest in their parent AMC funds. As there is always a risk in having the entire portfolio in rupees, these funds balance the portfolio from the currency risk point of view. This is particularly relevant today as the rupee is losing value against the dollar and has fallen 10 per cent between August 1, 2011, and October 11, 2011.
However, experts say investors should go for funds that are truly global. This is because some funds invest more than 65 per cent of their corpus in Indian equities just to avoid paying long-term capital gains tax. The market performance of individual countries and regions depends on a mix of fundamentals, liquidity and sentiment. Hence, investors need to focus on long-term trends and corporate fundamentals rather than just economic growth. "A US fund does not necessarily give exposure to the US economy alone, as a large number of US companies have global operations that account for a signifi cant part of their revenue," says Bindal.
Global exchange-traded funds, for instance, can be a good place to start with. Ramasubramanian says investors with high risk appetites can take limited exposure to global funds. "Almost all overseas markets are trading low and it will be some time before they stabilise as the growth outlook for these economies is bleak," he says.
Although it is not easy to predict interest rate movements, most analysts say current rates are close to the peak. In this scenario, those in the lower tax bracket can invest in fi ve-year fi xed deposits, or FDs, which offer good returns. Else, fi xed maturity plans, or FMPs, are a good option, too, with yields close to 10 per cent.
"Unlike FMPs and FDs, where one is locked in at a particular yield, open-ended income funds, which are actively managed and focus on high-accrual securities, offer the twin benefi ts of lower sensitivity to interest rates and the potential for capital gains during monetary easing," says Bindal.
Most long-term income and gilt funds have given returns of around nine per cent over the last fi ve years in spite of the interest rate volatility (see Top Debt Bets). Short-term income funds with maturity of six months to two years also offer value, says Ramasubramanian.
Over the last six months to three years, short-term income funds have delivered the best returns. You must follow a set investment plan and conduct periodic reviews to see how close you are to your objectives and whether you need any course correction.
"Ups and downs do happen in economies and markets. One's portfolio should be capable of sailing through such conditions easily," says Sudhakar Ramasubramanian, Managing Director, Aditya Birla Money.
Portfolios designed after risk profi ling and those in line with the investor's long-term goals may not face turbulence, he adds Gaurav Mashruwala, a certifi ed fi nancial planner, says investors should not alter their basic strategy based on market conditions. However, they could modify their portfolios based on regulatory or other developments. For instance, they should be on the lookout for new products and the emergence of new industries. Or, the market regulator may permit investment in a global index.
Stick to your plan
"Investors should build a well-rounded portfolio keeping in mind the infl ation rate and real returns," says Harshendu Bindal, President, Franklin Templeton Investments (India). From a fi veyear perspective, they can invest 75 per cent equity allocation in diversifi ed or large-cap funds and the rest in sector or thematic funds, he adds. They can also either buy stocks at the current low valuations, or go for systematic investing to lower the impact of volatility. Experts recommend the latter as large-cap diversifi ed funds are like defensive stocks which outperform other assets in the long run.
The top 10 diversifi ed large-cap equity funds have given a compounded average annual return of 29 per cent as compared to the Bombay Stock Exchange's 18 per cent, between September 2001 and October 2011.
In the last fi ve years, defensive sectors such as pharmaceutical and fast moving consumer goods, or FMCG, have outperformed the market. FMCG and health care funds have delivered average returns of 15 per cent to 22 per cent, respectively, as compared to seven per cent by largecap equity funds.
Should investors increase exposure to these sectors? "During uncertainty, defensive sectors do come into prominence, but it is important to remember that they have limited importance for the overall portfolio," says Ramasubramanian. "You may marginally increase exposure to defensive themes, but these sectors also move down with the market."
"In a growing economy like India, growth sectors are likely to give good returns over the medium to long term," says Bindal. The focus should be on investment objective rather than short-term market trends. "Defensive sectors may outperform over the next six months. However, their performance may even out over one or two years," says Anil Rego, CEO, Right Horizons, a fi nancial planning fi rm. Sector-based funds can be the satellite part of a portfolio.
However, their performance needs to be tracked closely as most people are unable to exit such funds on time, says Rego.
Investors have the choice of global funds offered by Indian asset management companies, or AMCs. These are typically "fund of funds" or feeder funds that invest in their parent AMC funds. As there is always a risk in having the entire portfolio in rupees, these funds balance the portfolio from the currency risk point of view. This is particularly relevant today as the rupee is losing value against the dollar and has fallen 10 per cent between August 1, 2011, and October 11, 2011.
However, experts say investors should go for funds that are truly global. This is because some funds invest more than 65 per cent of their corpus in Indian equities just to avoid paying long-term capital gains tax. The market performance of individual countries and regions depends on a mix of fundamentals, liquidity and sentiment. Hence, investors need to focus on long-term trends and corporate fundamentals rather than just economic growth. "A US fund does not necessarily give exposure to the US economy alone, as a large number of US companies have global operations that account for a signifi cant part of their revenue," says Bindal.
Global exchange-traded funds, for instance, can be a good place to start with. Ramasubramanian says investors with high risk appetites can take limited exposure to global funds. "Almost all overseas markets are trading low and it will be some time before they stabilise as the growth outlook for these economies is bleak," he says.
Although it is not easy to predict interest rate movements, most analysts say current rates are close to the peak. In this scenario, those in the lower tax bracket can invest in fi ve-year fi xed deposits, or FDs, which offer good returns. Else, fi xed maturity plans, or FMPs, are a good option, too, with yields close to 10 per cent.
Most long-term income and gilt funds have given returns of around nine per cent over the last fi ve years in spite of the interest rate volatility (see Top Debt Bets). Short-term income funds with maturity of six months to two years also offer value, says Ramasubramanian.
Over the last six months to three years, short-term income funds have delivered the best returns. You must follow a set investment plan and conduct periodic reviews to see how close you are to your objectives and whether you need any course correction.
Courtesy: Money Today
