How to build mutual fund portfolio to withstand stock market pressures
Here's how you can build a mutual fund portfolio that can weather all market storms.
The stock markets are volatile and can go in either direction. 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 fine, and often advised, financial advisors say investors must build a portfolio that can give good returns in the toughest of times. We explain how.
"We need to keep in mind that ups and downs do happen in economies and markets. One's portfolio should be capable of smoothly sailing through such conditions," says Sudhakar Ramasubramanian, MD, Aditya Birla Money. Portfolios designed after risk profiling and in line with one's long-term goals may not face turbulence, he says.
MUST READ: How to cut risk when investing in MFs
Gaurav Mashruwala, a certified financial planner, says investors should not alter their basic strategy based on market conditions. However, they may modify their portfolio based on regulatory or other developments, he says. For instance, one must always be on the lookout for new products and emergence of new industries. Or, the market regulator may permit investment in a global index. Else, one may want to invest in a new international fund.
STICK TO YOUR PLAN
"Investors should build a well-rounded portfolio keeping in mind the inflation rate and real returns," says Harshendu Bindal, president, Franklin Templeton Investments (India).
From a five-year perspective, one can invest 75% equity allocation in diversified/large-cap funds and the rest in sector or thematic funds, he says. Also, one can buy stocks at the current low valuations or go for systematic investing to lower the impact of volatility. Most experts recommend the latter, suggesting that large-cap diversified funds are like defensive stocks which outperform other assets over the long run.
10 top diversified large-cap equity funds have given an average compounded annual return of 29% in the past 10 years
The top 10 diversified large-cap equity funds have given a compounded average annual return of 29%, while the Bombay Stock Exchange Sensex has returned 18%, between September 2001 and October 2011. In the last five years, defensive sectors such as pharmaceutical and fast moving consumer goods (FMCG) have outperformed the market. FMCG and healthcare funds have delivered average returns of 15% and 22%, respectively, compared to 7% by equity large-cap finds.
This makes you wonder if you should increase exposure to these sectors. "Yes, during uncertainty, defensive sectors do come into prominence, but it is important to bear in mind that they have limited importance for the overall portfolio," says Ramasubramanian.
"You may marginally increase exposure to defensive themes, but it is a fact that these sectors also move down with the market," he says.
"In a growing economy like India, growth sectors are likely to give good returns over the medium to long term," says Bindal. Focus on the investment objective rather than short-term market trends.
"Defensive sectors may outperform over the next six months. However, their performance may get evened out over one-two years," says Anil Rego, CEO, Right Horizons, a financial planning firm.
Sector-based funds can be the satellite part of your portfolio. However, their performance needs to be tracked closely as most people are unable to exit such funds on time, says Rego.
GOING GLOBAL
Investors have the choice of global funds offered by Indian asset management companies (AMCs). These are typically fund of funds or feeder funds that invest in their parent AMC funds. As there is always the risk of 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% between August 1, 2011, and October 11, 2011.
However, experts say one must invest in funds that are truly global. This is because some funds invest more than 65% corpus in Indian equities just to avoid paying long-term capital gains tax. This beats the purpose of global diversification.
The market performance of individual countries and regions depends on a mix of fundamentals, liquidity and sentiment. Hence, investors need to focus on longterm trends and corporate fundamentals rather than just economic growth of countries. "For example, 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 significant part of their revenue," says Bindal. Global exchange-traded funds, for instance, can be a good place to start with.
Aditya Birla Money's Ramasubramanian says investors with high risk appetite 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.
DEBT STRATEGY
Although it is not easy to predict interest rate movements, most analysts say we are close to the peak. In the current scenario, those in the lower tax bracket can invest in five-year fixed deposits (FDs), which are offering good returns. Else, fixed maturity plans (FMPs) are a good option with yields of close to 10%.
"In a growing economy like India, growth sectors are likely to give good returns over the medium to long term"
Harshendu Bindal | President, Franklin Templeton Investments (India)
"Unlike FMPs and FDs, where one is locked in at a particular yield, open-ended income funds that are actively managed and focus on high-accrual securities offer the twin benefits 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 in excess of 9% over the last five 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 among all debt instruments.
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.
"We need to keep in mind that ups and downs do happen in economies and markets. One's portfolio should be capable of smoothly sailing through such conditions," says Sudhakar Ramasubramanian, MD, Aditya Birla Money. Portfolios designed after risk profiling and in line with one's long-term goals may not face turbulence, he says.
MUST READ: How to cut risk when investing in MFs
Gaurav Mashruwala, a certified financial planner, says investors should not alter their basic strategy based on market conditions. However, they may modify their portfolio based on regulatory or other developments, he says. For instance, one must always be on the lookout for new products and emergence of new industries. Or, the market regulator may permit investment in a global index. Else, one may want to invest in a new international fund.
STICK TO YOUR PLAN
"Investors should build a well-rounded portfolio keeping in mind the inflation rate and real returns," says Harshendu Bindal, president, Franklin Templeton Investments (India).
From a five-year perspective, one can invest 75% equity allocation in diversified/large-cap funds and the rest in sector or thematic funds, he says. Also, one can buy stocks at the current low valuations or go for systematic investing to lower the impact of volatility. Most experts recommend the latter, suggesting that large-cap diversified funds are like defensive stocks which outperform other assets over the long run.
10 top diversified large-cap equity funds have given an average compounded annual return of 29% in the past 10 years
The top 10 diversified large-cap equity funds have given a compounded average annual return of 29%, while the Bombay Stock Exchange Sensex has returned 18%, between September 2001 and October 2011. In the last five years, defensive sectors such as pharmaceutical and fast moving consumer goods (FMCG) have outperformed the market. FMCG and healthcare funds have delivered average returns of 15% and 22%, respectively, compared to 7% by equity large-cap finds.
This makes you wonder if you should increase exposure to these sectors. "Yes, during uncertainty, defensive sectors do come into prominence, but it is important to bear in mind that they have limited importance for the overall portfolio," says Ramasubramanian.
"You may marginally increase exposure to defensive themes, but it is a fact that these sectors also move down with the market," he says.
"In a growing economy like India, growth sectors are likely to give good returns over the medium to long term," says Bindal. Focus on the investment objective rather than short-term market trends.
"Defensive sectors may outperform over the next six months. However, their performance may get evened out over one-two years," says Anil Rego, CEO, Right Horizons, a financial planning firm.
Sector-based funds can be the satellite part of your portfolio. However, their performance needs to be tracked closely as most people are unable to exit such funds on time, says Rego.
GOING GLOBAL
Investors have the choice of global funds offered by Indian asset management companies (AMCs). These are typically fund of funds or feeder funds that invest in their parent AMC funds. As there is always the risk of 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% between August 1, 2011, and October 11, 2011.
However, experts say one must invest in funds that are truly global. This is because some funds invest more than 65% corpus in Indian equities just to avoid paying long-term capital gains tax. This beats the purpose of global diversification.
The market performance of individual countries and regions depends on a mix of fundamentals, liquidity and sentiment. Hence, investors need to focus on longterm trends and corporate fundamentals rather than just economic growth of countries. "For example, 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 significant part of their revenue," says Bindal. Global exchange-traded funds, for instance, can be a good place to start with.
Aditya Birla Money's Ramasubramanian says investors with high risk appetite 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.
DEBT STRATEGY
Although it is not easy to predict interest rate movements, most analysts say we are close to the peak. In the current scenario, those in the lower tax bracket can invest in five-year fixed deposits (FDs), which are offering good returns. Else, fixed maturity plans (FMPs) are a good option with yields of close to 10%.
"In a growing economy like India, growth sectors are likely to give good returns over the medium to long term"
Harshendu Bindal | President, Franklin Templeton Investments (India)
"Unlike FMPs and FDs, where one is locked in at a particular yield, open-ended income funds that are actively managed and focus on high-accrual securities offer the twin benefits 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 in excess of 9% over the last five 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 among all debt instruments.
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.
