Decisions That Can Impact Your MF Portfolio

Hemant Rustagi
Chief Executive Officer,
Wiseinvest Advisors 

Mutual funds are redefining the landscape of investors in our country. One of the major factors that works in favour of mutual funds is that they are a simple yet effective investment vehicles that allow investors to build a portfolio of varied options across different asset classes based on their risk profile and time horizon.

However,investing in mutual funds is not so simple, as one has to take number of decisions relating to how to invest in them, how to choose funds and work out the best investment strategy for investing in them. In fact, the level of investment success an investor can achieve will depend upon how some of these critical decisions are made. Here are a few of these and how investors can make the right choice.

Direct Plan vs Regular Plan : It is a known fact that direct plans are cheaper for investors. However, considering the skill required for taking important steps like ascertaining asset allocation, choosing the right funds within an asset class, monitoring the progress of the portfolio, taking corrective measures and keeping focus on the goals till the completion of defined time horizon, one must be sure about one’s ability to do so efficiently. The inability to follow the right process can prove very costly either in the form of taking risk beyond one’s capacity or earning below average returns and that can compel investors to compromise on some of their investment goals. As is evident, you must look beyond TER and then make a decision whether to go direct or regular. 

SIP vs STP : Investors often struggle to decide whether to invest through SIP or STP. The fact remains that both these propagate systematic investing. For someone who has a lump sum amount, but would like to invest in a disciplined manner, there are two choices. While one can enrol for SIP and allow the money to be moved into a pre-decided fundfrom the savings bank account through NACH, under the STP, the lump sum amount is invested either in a liquid or an ultra short-term fund and instructions are given to the fund house to transfer a fixed sum every month into a pre-decided fund. 

Broadly speaking, STP is a better option than SIP as liquid/ultra short-term income funds have the potential to provide higher return than savings bank account and hence one can benefit from the higher returns during the period of systematic transfer. Besides, there is always a possibility of the money being utilised for some other purpose if it remains in a bank account.

Needless to say, SIP remains a great option for someone looking to build a corpus for an investment objective to be achieved over a defined time horizon.

Small vs Large Corpus : The size of a fund can certainly be one of the factors in the decision-making process of investors. However, the impact varies depending on the kind of funds one intends to invest in. For certain categories of funds like liquid, ultra-short term, income funds and large-cap oriented equity and equity-related funds, the large size is not a handicap. Similarly, for small-cap and mid-cap, sectoral and thematic funds, smaller size can be a positive as stock picking is a major differentiator for these funds. Besides, once the new TER becomes applicable from April 1, 2019, investors in larger funds will pay lower expenses as compared to the ones that have smaller corpus. However, this should not make you compromise on the quality of the fund you choose to invest in. 

Multi-cap vs Large, Mid and Small Cap Funds : Ideally, average equity fund investors should have an exposure of around 50-60 percent in large-cap, and the rest in a mix of mid-cap and small-cap stocks. Considering that after SEBI’s decision to categorise and rationalise funds and that small-cap funds have a much wider investment universe, a significant part of allocation to these two segments can be invested in small-cap funds. However, maintaining this allocation can be a difficult process if investors decide to invest in large, mid and small-cap funds separately. Therefore, multi-cap funds can be a great option to maintain this allocation as fund managers rebalance the portfolio from time to time without making any dent in investor’s returns by way of taxes.