Heres How To Gain More From Your MF Investments

Here’s How To Gain More From Your MF Investments 

Hemant Rustagi Chief Executive Officer, Wiseinvest Advisors 


There are a number of factors like diversification, professional money management, tax efficiency of returns, liquidity and transparency that makes mutual funds an ideal investment option for investors with varied time horizons and risk profiles. However, despite these inherent advantages, it is important for investors to choose their funds well, remain committed to their defined time horizons and handle the volatility well to benefit from them. While all these factors play a significant role in determining the level of success an investor would achieve, the process leading up to the stage of fund selection lays the foundation of a successful mutual fund portfolio. Let’s understand more about these factors and how not to falter in tackling them. 

Define risk profile
Risk tolerance plays a significant role in designing an optimum investment strategy. In fact, the key to investment success is to build a portfolio that maintains the right balance between risk and reward. Hence, you must follow the right process to determine your risk profile. 

Follow an asset allocation strategy
Asset allocation determines how you divide your portfolio among different asset classes like equity, debt and gold. Simply put, asset allocation helps in controlling risk as different asset classes react differently to changes in market conditions such as inflation, rising or falling interest rates or a market segment coming into or falling out of favour. Overall, asset allocation determines the kind of risk you would be taking and the commensurate returns you can expect from your portfolio. It is a proven fact that majority of the portfolio returns come from the asset allocation.

Remember, asset allocation is different from simple diversification. For example, if your portfolio has five equity funds either with similar investment strategies/philosophies or investing in stocks belonging to the same market cap, like large, mid and small cap, it will not do much to control the risk in your portfolio. In case of an adverse reaction, all these funds will react in a similar way. On the other hand, different asset classes will react differently in any given situation.

Mutual funds are the most appropriate vehicle to practice asset allocation successfully. They not only provide diversification, but also offer a “family of funds” to suit your varied investment objectives. Moreover, they also provide opportunities to re-balance the portfolio, which may be required consequent to changes in your circumstances.

Diversify across different market caps
Market cap of a company signifies its market value, which is equal to the total number of shares outstanding multiplied by the current stock price. It has a role to play in the kind of returns the stock might deliver and the riskiness or volatility that you may have to encounter from the stock. For example, large cap companies are usually more stable during the turbulent periods, while the mid cap and small cap companies are more vulnerable.

As regards the allocation to each segment, there cannot be a standard combination applicable to all kinds of investors. Each one of us have different risk profile, time horizon and investment objectives. Therefore, the allocation to these segments would depend upon whether you are an existing investor or a first-time investor. If you are an existing investor, your existing allocation must be considered. If you are a first-time investor, you will do well to begin with funds that invest predominantly in large cap stocks and have small presence in mid cap and small cap stocks.

Do not hesitate to take help of a professional advisor if you are not sure about how to decide the allocation and rebalance the portfolio from time to time. However, as an investor, you will always have an important role to play in this process as your outputs define the broad parameters to get the allocation right. 

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