Keep pace with changing times
Investors will need to restructure their mutual fund portfolios according to their risk profiles and financial goals.
Financial planning is a longterm process. Short-term developments and market movements should, therefore, not have a bearing on your investment decision. This is the popular refrain among wealth planners. While we remain rooted to this belief, a yearly review of your portfolio is not such a bad idea, especially after a year of regulatory and policy changes that may directly impact your investment and financial planning.
As the curtain fell on 2010, the country's equity markets slipped into a volatile phase following the housing loan and 2G spectrum scams, surging interest rates and global economic uncertainties. While the impact of the scams on market sentiments may not last long, the other two concerns may prove to be a drag on the equity markets, at least in the first few months of 2011. The recent volatility can linger for some time in 2011. Consequently, this might have a bearing on mutual funds, or MFs, with exposure to equities. Here are the fundamental dos and don'ts for making an investment decision in the new year.
Rebalance your portfolio
A periodic rebalancing or review of your portfolio is an essential part of financial planning, and what better time to review your investments than the last quarter of a financial year. These are the first three months of 2011, when most of your tax investments are finalised or finetuned. A suitable mix of debt and equity in your MF portfolio, depending on your goals, needs and market conditions, is one of the ways to ensure sustained long-term wealth creation.
If your ideal equity-debt ratio is 70:30 and the surge in the market over the past one year has skewed your portfolio towards equities, this is the time to either tread back to the 70:30 mix or to cut equity exposure further.
Usually, a price-to-earnings, or P-E, multiple of 20 or more in major equity indices calls for a cut in your equity exposure. At present, both the National Stock Exchange's Nifty and the Bombay Stock Exchange's Sensex indices are trading at P-E multiples of 21-22.
According to Gagan Randev, Chief Executive Officer of Religare Securities, at high P-E levels, investors should partially book profits from their equity funds and put the money in liquid and short-term debt funds. Given the emerging scenario in the financial market, how should you adjust your MF portfolio during 2011? Here are some tips based on possible market scenarios.
Volatile markets
Volatile equity markets can be unnerving for any investor with high equity exposure. When the markets move in a unidirectional manner - up or down - you could either get in or get out. But the swings in the market over the past year have made it difficult to take a call. This is the time when the systematic investment plan, or SIP, comes in handy. Regular investments at fixed intervals of a month or a quarter help in averaging out costs and reducing risk.
"In the three-year period beginning December 2007, the equity markets saw one of the biggest crashes followed by a speedy recovery. However, those who had invested through SIPs during the period, gained the most despite the volatility," says Kalpen Parekh, Deputy Chief Executive Officer at IDFC MF. According to Sankaran Naren, Chief Investment Officer at ICICI Prudential MF, investors should look at long-term SIPs.
Another way to insulate your portfolio from market volatility is to have a multi-cap strategy, with the major portion of equity portfolio in large-cap funds and the rest in midcap funds. In an uncertain market, 60-70 per cent exposure to large-cap funds and 30-40 per cent exposure to mid-caps can potentially do well.
Bearish market
With the Nifty and the Sensex trading in the over-valuation zone, the indices could be in for a correction. A typical asset allocation strategy (shifting between debt and equity funds according to market conditions) takes care of your portfolio in a falling market. In a market undergoing correction, you can gradually increase your equity exposure.
"One can increase weightage to high-risk, high-return assets such as equities and switch money from liquid/debt funds to equity funds if the long-term future of the equity market looks good," says Randev.
In a falling market, the impact on large-cap funds is much less than that on mid- and small-cap funds. Also, large-cap funds usually recover faster than mid- and small-cap funds. "In a falling market, we recommend investing 100 per cent in large-cap funds or large-cap index funds," says Navneet Munot, Chief Investment Officer at SBI MF.
Bullish Market
If the markets rise gradually, investors should remain invested without worrying too much about reviewing or rebalancing. However, if they move up disproportionately and valuations get stretched, there is a case for rebalancing.
"In case the equity markets continue to show an upward bias, investors should follow the asset allocation strategy depending upon their objectives as well as their risk appetites. However, they can look at booking some profits periodically," says Naren.
Increasing the weightage of midcap funds in your portfolio will help generate higher returns than the broader market. However, large-cap funds should continue to be the core of your portfolio as they lend safety and stability to your portfolio.
Debt fund options
Debt funds offer stability and performance when equity funds become overvalued. With interest rates going up, returns from debt instruments have already increased significantly. Interest rates might move upwards if the Reserve Bank of India increases policy rates to tame inflation.
Therefore, in the short to medium term, debt funds offer good investment opportunities. The first quarter of 2011, in particular, will offer a good entry point in fixed income funds such as fixed maturity plans, or FMPs, and shortterm bond funds.
"Due to the liquidity squeeze, commercial paper and certificates of deposit are fetching around nine per cent return. The yield of the 10-year government paper is in the band of 8.1-8.2 per cent. Investors can increase the allocation to debt schemes due to the higher accrual and scope for rates to come down later as headline inflation falls down due to base effect and higher farm output," says Murthy Nagarajan, Head of Fixed Income at Tata MF.
Long-term Savings As interest rates are slowly rising and are expected to remain stable with a slight upward movement in the medium to long term, medium and slightly longer duration bond funds, such as gilt and income funds, are likely to give decent returns. FMPs are a good pick for generating income if invested till maturity.
Regular Income
MIPs, which pay regular dividends, can be used as an alternative source of income. However, one must remember that the dividend payout is not guaranteed and is subject to availability of funds. These are available in various flavours, with different allocation in debt, equities and gold. "MIPs have seen a lot of inflows. The data for the past seven-eight months shows that MIPs are worth Rs 20,000 crore," says Waqar Naqvi, CEO of Taurus MF.
Regulatory Changes
In the new year, all MF investors will have to comply with KYC, or know your customer, norms, irrespective of the investment amount. Earlier, KYC was mandatory only for investments above Rs 50,000. So, make sure you have all the documents in place and comply with KYC norms to avoid discontinuation of investments.
Another change in the offing is that interval funds, which are FMPs with a premature exit option, will cease to offer the early redemption route from April 1, 2011. Investors who used to prefer interval funds purely for liquidity considerations may now have to reconsider their investment decisions. FMPs are closedended funds, which do not allow premature redemptions by paying exit loads.
For retail investors, MFs are the best option for long-term wealth creation. It is high time that these become the core of their portfolios. The key to reaping maximum benefits is to remain invested in a mix of well-diversified equity and debt funds.
As the curtain fell on 2010, the country's equity markets slipped into a volatile phase following the housing loan and 2G spectrum scams, surging interest rates and global economic uncertainties. While the impact of the scams on market sentiments may not last long, the other two concerns may prove to be a drag on the equity markets, at least in the first few months of 2011. The recent volatility can linger for some time in 2011. Consequently, this might have a bearing on mutual funds, or MFs, with exposure to equities. Here are the fundamental dos and don'ts for making an investment decision in the new year.
Rebalance your portfolio
A periodic rebalancing or review of your portfolio is an essential part of financial planning, and what better time to review your investments than the last quarter of a financial year. These are the first three months of 2011, when most of your tax investments are finalised or finetuned. A suitable mix of debt and equity in your MF portfolio, depending on your goals, needs and market conditions, is one of the ways to ensure sustained long-term wealth creation.
If your ideal equity-debt ratio is 70:30 and the surge in the market over the past one year has skewed your portfolio towards equities, this is the time to either tread back to the 70:30 mix or to cut equity exposure further.
Usually, a price-to-earnings, or P-E, multiple of 20 or more in major equity indices calls for a cut in your equity exposure. At present, both the National Stock Exchange's Nifty and the Bombay Stock Exchange's Sensex indices are trading at P-E multiples of 21-22.
According to Gagan Randev, Chief Executive Officer of Religare Securities, at high P-E levels, investors should partially book profits from their equity funds and put the money in liquid and short-term debt funds. Given the emerging scenario in the financial market, how should you adjust your MF portfolio during 2011? Here are some tips based on possible market scenarios.
Volatile markets
Volatile equity markets can be unnerving for any investor with high equity exposure. When the markets move in a unidirectional manner - up or down - you could either get in or get out. But the swings in the market over the past year have made it difficult to take a call. This is the time when the systematic investment plan, or SIP, comes in handy. Regular investments at fixed intervals of a month or a quarter help in averaging out costs and reducing risk.
"In the three-year period beginning December 2007, the equity markets saw one of the biggest crashes followed by a speedy recovery. However, those who had invested through SIPs during the period, gained the most despite the volatility," says Kalpen Parekh, Deputy Chief Executive Officer at IDFC MF. According to Sankaran Naren, Chief Investment Officer at ICICI Prudential MF, investors should look at long-term SIPs.
Another way to insulate your portfolio from market volatility is to have a multi-cap strategy, with the major portion of equity portfolio in large-cap funds and the rest in midcap funds. In an uncertain market, 60-70 per cent exposure to large-cap funds and 30-40 per cent exposure to mid-caps can potentially do well.
Bearish market
With the Nifty and the Sensex trading in the over-valuation zone, the indices could be in for a correction. A typical asset allocation strategy (shifting between debt and equity funds according to market conditions) takes care of your portfolio in a falling market. In a market undergoing correction, you can gradually increase your equity exposure.
"One can increase weightage to high-risk, high-return assets such as equities and switch money from liquid/debt funds to equity funds if the long-term future of the equity market looks good," says Randev.
In a falling market, the impact on large-cap funds is much less than that on mid- and small-cap funds. Also, large-cap funds usually recover faster than mid- and small-cap funds. "In a falling market, we recommend investing 100 per cent in large-cap funds or large-cap index funds," says Navneet Munot, Chief Investment Officer at SBI MF.
Bullish Market
| Current market flavours With changing market dynamics, fund houses have come out with new funds to suit investors' needs. As equity markets are likely to remain volatile in 2011 and interest rates to remain high, fund houses are launching appropriate funds. Dynamic asset allocation fund: These funds automatically switch between different asset classes - debt and equity - depending upon certain predefi ned market triggers. Principal Smart Equity fund and Pramerica Dynamic fund are two such funds launched recently. SBI Mutual Fund has also sought approval for a similar product. Capital protectionoriented fund: With volatility as the key concern among investors, fund houses have lined up capital protectionoriented funds. These are conservative hybrid funds that have a 80-90 per cent investment in debt papers and a lock-in period of three-fi ve years. Recently, JP Morgan Mutual Fund and Sundaram Mutual Fund launched their capital protection funds, while several others are in the process of following suit. ETFs and index funds: Virtually every fund house is launching index funds as the cost of operating such funds is low. Apart from no risk from the fund manager's strategy, index funds are cheaper in terms of lower expense ratios. An index fund tries to replicate its benchmark index by investing in stocks of that particular index with the same weightage as in the index. |
"In case the equity markets continue to show an upward bias, investors should follow the asset allocation strategy depending upon their objectives as well as their risk appetites. However, they can look at booking some profits periodically," says Naren.
Increasing the weightage of midcap funds in your portfolio will help generate higher returns than the broader market. However, large-cap funds should continue to be the core of your portfolio as they lend safety and stability to your portfolio.
Debt fund options
Debt funds offer stability and performance when equity funds become overvalued. With interest rates going up, returns from debt instruments have already increased significantly. Interest rates might move upwards if the Reserve Bank of India increases policy rates to tame inflation.
Therefore, in the short to medium term, debt funds offer good investment opportunities. The first quarter of 2011, in particular, will offer a good entry point in fixed income funds such as fixed maturity plans, or FMPs, and shortterm bond funds.
"Due to the liquidity squeeze, commercial paper and certificates of deposit are fetching around nine per cent return. The yield of the 10-year government paper is in the band of 8.1-8.2 per cent. Investors can increase the allocation to debt schemes due to the higher accrual and scope for rates to come down later as headline inflation falls down due to base effect and higher farm output," says Murthy Nagarajan, Head of Fixed Income at Tata MF.
Long-term Savings As interest rates are slowly rising and are expected to remain stable with a slight upward movement in the medium to long term, medium and slightly longer duration bond funds, such as gilt and income funds, are likely to give decent returns. FMPs are a good pick for generating income if invested till maturity.
Regular Income
Navneet Munot, Chief Investment Officer, SBI MF
Regulatory Changes
In the new year, all MF investors will have to comply with KYC, or know your customer, norms, irrespective of the investment amount. Earlier, KYC was mandatory only for investments above Rs 50,000. So, make sure you have all the documents in place and comply with KYC norms to avoid discontinuation of investments.
Another change in the offing is that interval funds, which are FMPs with a premature exit option, will cease to offer the early redemption route from April 1, 2011. Investors who used to prefer interval funds purely for liquidity considerations may now have to reconsider their investment decisions. FMPs are closedended funds, which do not allow premature redemptions by paying exit loads.
For retail investors, MFs are the best option for long-term wealth creation. It is high time that these become the core of their portfolios. The key to reaping maximum benefits is to remain invested in a mix of well-diversified equity and debt funds.
Courtesy: Money Today
