Invest For Value, Not Numbers

Hemant Rustagi
Chief Executive Officer, Wiseinvest Pvt Ltd.

If you are an existing investor in equity funds or looking to add them in your portfolio, it is vital to not only make the right choice but also have the right mindset. That’s because stock market volatility will challenge your patience and resolve during your defined time horizon. Many investors grapple with implications of market volatility on their portfolios as well as with the resultant indecision while making fresh investments in equity funds. Besides, they often struggle with the positioning of the certain types of funds in their portfolio.

Invariably, this results in over-exposure to certain fund categories that may either not suit their requirements or create unrealistic expectations in terms of returns. So how should you go about tackling these issues? Since it is difficult to predict the markets over the short-term, you must focus on the long-term potential of the market and the entire strategy should revolve around that. Remember, time and patience is an investor’s best allies in reducing the impact of market volatility. As regards managing risk and expectations, you need to weigh the risks and potential rewards associated with an investment.

All of us know about our risk tolerance and comfort level with the ups and downs in the market and the same should be considered with complete honesty at the time of allocating money to different types of funds. Remember, while the stock market drops can be steep and fast, the rise can just be as quick. Therefore, the key is to stay invested and benefit from the true potential of the equity market. During the selection process, the focus should be on funds that are managed well and have a consistent performance track record. The right mix of funds in the portfolio can go a long way in achieving the desired results.

Here are a few categories of funds that can play a significant role in your portfolio.

Flexi-Cap Funds
These funds invest a minimum of 65 per cent of their corpus in equities.

During the selection process, the focus should be on funds that are managed well and have a consistent performance track record

The fund manager has the flexibility to take exposure to Large-Cap, Mid-Cap and small-cap segments without any restrictions. The allocation to different segments depends on growth potential, historical performance and the attendant risks that these companies and sectors carry. As is evident, flexi-cap funds are equipped with the flexibility to move across market-caps and tap opportunities available in each market-cap segment.

Large-Cap and Mid-Cap Funds
Large-cap and mid-cap funds invest in the stocks of companies with large and medium-sized capitalisations. These funds have to invest a minimum of 35 per cent each of their total assets in equity and equity-related instruments of large-cap and mid-cap companies. Simply put, the investment universe of these funds is the largest – 250 stocks listed in the Indian markets. You must have a close look at the holdings to figure out whether the fund has a bias towards large-cap stocks or mid-cap stocks. This will help you select a fund in line with your risk profile.

Multi-Cap Funds
Multi-cap funds have to invest at least 75 per cent of their assets in equity and equity-related instruments at any point in time. The portfolio must allocate at least 25 per cent of its assets to large-cap stocks, 25 per cent to mid-cap stocks and another 25 per cent to small-cap stocks. While a multi-cap fund ensures diversification across all markets segments at all times, it can also be risky in the short term since it has at least 50 per cent exposure to small-cap and mid-cap stocks. Considering that flexi-cap funds provide more flexibility to the fund managers to move money across market-caps, they can be a better bet than multi-cap funds.