The Right Fit

Ali On Content / 23 May 2011

- By HEMANT RUSTAGI
CEO 
Wiseinvest Advisors Pvt Ltd

Many mutual fund investors make the mistake of not investing in funds that suit their needs and hence end up compromising their chances of success in the beginning itself. As we all know, a good start is half the job done! Therefore, one must select the funds carefully rather than following a haphazard approach. The key factors in this process are the time horizon, i.e. the period for which one intends to invest, risk profile, investment objectives and the type of investment strategy one follows. Some of us are naturally averse to risks and invest too conservatively, which impacts our ability to grow our savings and investments.

The difference between a conservative and an aggressive investment approach relates to the proportions of the various instruments that one has in the portfolio. A genuinely risk-averse investor generally has a heavy bias towards traditional fixed return instruments. However, to improve post-tax returns, it is necessary to consider various debt and debt-related schemes which are more tax-efficient and liquid. Then there are balanced investors who are willing to take some risk on their investment to improve their returns. Depending on the level of risk they are willing to take, mutual funds offer debt as well as equity-oriented hybrid schemes like monthly income plans, fund of funds and balanced funds.

For an aggressive investor, there are many options available from mutual funds. Apart from diversified equity funds, there are specialty and sector funds. It is generally perceived that only young people and those who have very few commitments should invest in equities. But the fact is that investing in equity funds in a disciplined way for long term not only improves overall returns but also eases the savings burden in terms of amount that one needs to save over a period of time.

To ensure that you are selecting the funds that are appropriate for your needs, consider the following: 
• Clearly determine what your financial goals are.
• Consider your time frame. Do you need money in six months time or six years? The longer your time horizon, the more risk you may be able to take.
• How do you feel about risk? Are you in a position to tolerate the ups and downs of the stock market for the possibility of higher returns? It is necessary to know your own risk tolerance. It can be a guide for choosing the right schemes. Remember, regardless of the potential returns, if you are not comfortable with a particular asset class, you should consider other options.
All these factors will have a direct impact on the fund you choose as well as the achievements of your goals. The most important thing that you need to keep in mind is that your desire to take risk should not exceed your capacity to take risk. While it is true that in the long run equities have the potential to outperform all the asset classes, it is important to have the right level of exposure in equity funds based on one’s risk profile and time horizon. A long-term approach helps in reaping the benefits from the expertise of the professional fund managers as your investments are likely to appreciate steadily over time, overcoming most temporary setbacks.
If you are willing to have a long-term view and wish to build a portfolio of equity funds, it would be wise to invest systematically over a period of time. By doing so, you can not only reduce your anxiety about the current market level but also benefit from ‘cost averaging’. Besides, for those who may like to book profits periodically or re-balance their portfolio from time to time, dividend payout option can do the needful. By receiving dividend, say once a year, one can ensure periodical profit booking as well as re-balance the portfolio without any tax implications.[PAGE BREAK]
Even if you have made the right selection, monitoring the performance remains one of the key factors. To do so, there are ample sources such as fact sheets, newsletters, websites and newspapers. These are provided by different sources like mutual funds, advisors, portals and agencies involved in MF analyses. Although all this information may seem overwhelming to a new investor, by tracking these over time one learns how to use them for keeping the portfolio on track.

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