In Mutual Funds, Its The Choice That Matters!

Volatility in the stock market is a natural phenomenon and hence you must be prepared to tackle it at all times

Mutual funds have proved to be an effective investment vehicle for investors the world over. In our country too, mutual funds are gradually finding their rightful place in the investment universe of investors with varying risk profile and time horizon. The ability of mutual funds to offer options to invest in line with your asset allocation to suit your varied goals makes them an ideal investment vehicle. While there is no doubt that mutual funds are a simple investment vehicle, investing in them may not always be an easy task since there are hundreds of schemes to choose from. 

Investors often err by choosing funds that don’t match their needs and by ignoring the need to balance risk and reward. That is why identifying the right level of risk tolerance and choosing the right funds should be the key focus areas while designing your portfolio. Simply put, if you are looking to build an aggressive long-term portfolio, your portfolio composition should be different from someone who may have a different time horizon and risk profile. Therefore, if you decide to invest in an aggressive fund, make sure that you have the risk appetite required to tackle the impact of volatility and that there is a place for such a fund in the portfolio. 

If you are not sure about the risk level in your portfolio, both in terms of allocation to equities and different market segments, it’s time to have a close look at your portfolio. You mustn’t hesitate to take steps to rebalance it, if required. If you are not confident of doing it yourself, take the help of a professional who can guide you in every step of your investment process. Remember, the temptation to increase exposure to aggressive categories of funds like those investing in Small-Cap stocks, sector as well as thematic funds can derail your investment process. 

While some of these categories of funds, if chosen well, have the potential to enhance overall portfolio returns, a disproportionately higher exposure in them can create an imbalance in risk and reward. As is evident, balancing risk and rewards holds the key to your investment success. One of the key factors that can help you achieve this is to have the right asset allocation for long-term goals as these require you to accumulate a large corpus. For example, asset allocation in the pre-retirement period i.e. 8 - 10 years before retirement is quite critical. That’s because most investors can be expected to have taken care of other important long-term goals like children’s education and buying a house by the time they reach this stage. 

Moreover, these are usually the best years in terms of capacity to save and invest as compared to the earlier years. Considering the time on hand before you need to start generating regular income, equities must be an integral part of the portfolio. Of course, the proportion of allocation to different asset classes holds the key from a risk and reward point of view. It’s important to avoid taking a new loan at this stage as it can disrupt your investment process. There may not be enough time to repay and that can put pressure on your investment process for retirement. 

If you are already repaying an existing loan, the attempt should be to repay it as early as possible. 

Last but not the least, you must continue with your investment process without interruption irrespective of the market conditions. While it is natural to get affected by the euphoria in a rising market and the panic in a falling market, it shouldn’t influence your long-term investment strategy. Remember, volatility in the stock market is a natural phenomenon and hence you must be prepared to tackle it at all times.