Maximise your MF portfolio in 2012

Hemant Rustagi
CEO, Wiseinvest Advisors

The year 2011 turned out to be a disappointing one for mutual fund investors who have been investing in equity and equity-oriented funds. The stock market has fallen around 23 per cent from its peak in November 2010, and that has taken its toll on their portfolios. Certainly, these are challenging times even for seasoned investors.

Therefore, as we move into 2012, it would be prudent to focus on investment goals and avoid taking hasty decisions that could jeopardise long-term investment success. Investors would also do well to revisit the basics of portfolio building, to ensure that investments remain on course and get the desired results. While the continued volatility in the stock market remains a concern for investors, history tells us that those who have patience and perseverance get their due in the long run. The key, therefore, is to continue the investment process in a disciplined manner, and to ensure that certain basic principles of mutual fund investment are followed diligently.

Listed below are a few of these principles. If followed, these will prepare your portfolio to get you the best results in the coming year:

Avoid Being Swayed By Short-Term Trends
While it is natural to get affected by the short-term performance of the stock market, don’t allow it to influence your long-term investment strategy. Either getting tempted to invest in a falling market or redeeming your holdings in panic may not be great ideas. While making regular investments is the perfect way to benefit from equity or equity-related investments, a haphazard approach to realigning one’s portfolio amidst short-term volatility is most likely to backfire.

Remember that when you make an attempt to speed up the process of recovering losses in your portfolio by investing short-term surplus money, often the result may not be as per your expectations. The main reason for this is the unpredictable nature of markets over the short term. However, over the longer term, these short-term fluctuations tend to smoothen out.

Put Performance in Perspective
We often get disillusioned by the negative returns of equity funds. The fact, however, is that negative returns do not necessarily mean poor performance. Even the best of fund managers are likely to deliver negative returns during periods when the markets go down significantly. For example, short-term negative returns in line with the market mean nothing from a fund that has been doing well for years. Similarly, even a bad fund manager can give decent returns when the markets are doing well. Besides, it is also possible that a fund manager gives impressive returns by exposing you to higher risks than your accepted level.

While we are likely to witness better economic and stock market performance in 2012, volatility could continue to dog the market’s heels. Hence, the key would be to keep your emotions in check and make rational decisions. [PAGE BREAK]
       
Reassess Your Selection Process  
Successful mutual fund investing requires a plan, as well as the discipline to stick to that plan. MFs allow investors to allocate investments assets across different fund categories in order to achieve a variety of risk/reward objectives, thereby reducing overall portfolio risk. In other words, the right way to benefit from MFs is to balance the risk as well as the earning potential. To this end, one needs to know the correct meaning of risk. Simply put, risk refers to the fluctuations in the NAVs, and can range from ‘stable’ to ‘very volatile’. That is why identifying the right level of risk tolerance and the right schemes remain the most important factors in ensuring the success of a mutual fund portfolio.

While selecting an equity fund, it is important to keep the risk profile in mind, and the mix of funds selected for the portfolio should reflect that. For example, the portfolio composition of an aggressive, long-term investor would be different from that of an investor with a different time horizon and risk profile. Similarly, if you decide to invest in a sector fund, make sure that you have the risk appetite required for such an investment, and that the existing funds in your portfolio do not have a substantial exposure to that sector. Besides, fund managers have different philosophies and styles. It is important to include funds with different styles to benefit from them.

If you haven’t been following the right selection process, it is time to have a close look at your portfolio. Do ensure that the composition has the right balance and the mix to achieve improved performance not only in 2012, but for many years to come.

Avoid Over-Diversifying Your Portfolio  
It is quite common to see portfolios with a large number of funds. Over-diversification is generally the result of following a haphazard approach, whereby one invests in every fund that comes one’s way. As a result, one may end up investing in a mix of good and bad performing funds. The presence of non-performing funds often pulls down the overall portfolio performance.

It is time that you take stock of the funds in your portfolio and begin weeding out the non-performing ones. Besides, it would pay to realign it to ensure that funds investing in aggressive segments such as Mid-Cap and Small-Cap do not have a very high exposure in the portfolio.

After ascertaining the right level of exposure to every segment of the market, consider getting rid of some of the schemes to get the right balance. While redesigning the portfolio, the focus should be on those funds in that have been performing consistently and have good quality investments.

Don’t Delay The Investment Process
Many of us delay investing, either for the fear of choosing a wrong investment option, or thinking that we do not have enough money. However, since investing is a continuous process, you can begin even if you don't have a lump sum amount to start with.

While the very thought of building a large corpus for retirement planning may be overwhelming, the fact is that if you invest regularly in an asset class like equity over a period of time, even a small sum of money can help you achieve your larger goals. For example, if you invest Rs 5000 every month in equity funds for a period of 20 years, and the money grows at the rate of 12 per cent, your investment will be worth Rs 50 lakhs.

Remember, the real power of compounding is manifest over time. Essentially, compounding is the idea that you can make money on the money you've already earned. That is why the earlier you start investing, the more your money can work for you. To look at this another way, for every 10 years you delay before starting to save for retirement, you will need to save three times as much each month to catch up. No matter how young you are, the sooner you begin investing, the better.

So, make a perfect beginning to 2012 by starting your investment process, and make your dreams come true.

KEY POINTS

•    While it is natural to get affected by the short-term performance of the stock market, don’t allow it to influence your long-term investment strategy.
•    Negative returns do not necessarily mean poor performance. Even the best of fund managers are likely to deliver negative returns during periods when the markets go down significantly.
•    After ascertaining the right level of exposure to every segment of the market, consider getting rid of some of the schemes to get the right balance, focussing on those funds in that have been performing consistently and have good quality investments.
•    No matter how young you are, the sooner you begin investing, the better. Since investing is a continuous process, you can begin even if you don't have a lump sum amount to start with.