IN FOCUS : Are You Managing Your Equity Portfolio Well?

Every investor who invests in equities either through stocks or mutual funds would want to buy low and sell high to maximise returns. However, in reality, it is practically impossible for anyone to practice it to perfection. Moreover, since the stock market seems quite mysterious to most investors, they often face the dilemma of how to tackle different market conditions.

Many of us become quite complacent during a rising market and usually focus on: where should I invest my money and how much return can I make? On the other hand, a declining stock market raises too many doubts in our minds and we often grapple with doubts such as: should I exit my equity fund portfolio and move into debt funds? Is this a great buying opportunity?  Should I redeem my holdings now and reinvest just before the market starts moving up? How long will the downturn last? These dilemmas often make it difficult for us to make a rational decision.

Thankfully, there are strategies that can help investors in tackling different market conditions. However, the unpredictable nature of the stock market, especially in the short to medium-term, makes it difficult for investors to practice these with a reasonable degree of success. That’s why it is always a good idea to opt for continuity in investment approach on a long-term basis rather than adopting haphazard short-term measures.

It is a proven fact that a disciplined investment approach can help you tackle most of the imperfections in the market. Therefore, if you want to accumulate a corpus through regular contributions in equity funds, you must enroll for a Systematic Investment Plan (SIP). It works very well because partly you abandon any strategy that might prompt you to time the market and partly because in the long run stock markets tend to perform better than other asset classes.

However, it is also important to understand that discipline remains the key to achieve investment success even when you invest systematically. It is quite common to see investors abandoning their well thought out investment strategy when the market turns volatile. The best way to tackle the turbulence in the stock market is to remember that volatility works well for disciplined investors as they benefit from averaging. A strategy that can keep you focused during such difficult periods is to align your investments to your goals. When you do so, you become clear about your time horizon and hence have the comfort of knowing that you have time on hand. It is equally important to continue your investment process during these volatile periods.

Another important aspect that requires attention is the selection of funds. Although one of the benefits of investing in mutual funds is that they offer a variety of funds, you must choose the right ones and in the right proportion. While there is always a temptation to invest in the best performing funds, you must go beyond the performance and focus on factors like suitability and level of exposure to different market segments such as large-cap, mid-cap and small-cap to create a balance between risk and reward. Don’t forget that equity as an asset class is aggressive, and by investing a substantial part of your portfolio in aggressive funds like mid-cap, thematic and sectoral ones doesn’t necessarily guarantee higher returns.

Once you invest the money, you would hope that funds in your portfolios always do well. In reality, however, there can be certain time periods when the performance of some of these funds may slip or become inconsistent.  Although a situation like this can create panic, you need to put performance into proper perspective. For example, if a fund losses ground in a falling market and falls in line with its benchmark index, it should not be much cause for concern. That’s because the stock market has a tendency to be volatile over short and medium term. On the other hand, if a fund goes down when its peers are giving positive returns, it should be taken as a warning signal. Remember, a skilled fund manager with a well-defined mandate can ensure that the fund remains among the front-runners consistently.

Last but not the least, don’t hesitate to realign the portfolio, if need be. However, before making any changes in the portfolio you must give sufficient time to the funds in the portfolio to perform. By acting in haste you may end up exiting from a fund that could prove to be a great performer in future. Once it is established that a fund in your portfolio is not able to keep pace with its peers, don’t delay the inevitable.