Are Your Equity Fund Investments On The Right Track?

Hemant Rustagi

The stock market performance over the last one year or so has encouraged an increasing number of investors to include equity funds in their portfolio. This fact is clearly evident from money being mobilized by mutual funds from domestic investors. It is heartening to see most investors taking SIP route to invest in equity funds. It is a proven fact that a systematic approach allows investors to avoid committing a large amount at a particular market level. In fact, investors benefit from “averaging” as they get to invest in the stock market through well-designed portfolios by professional fund managers. Moreover, this disciplined approach ensures that investors get into the habit of keeping some money aside for investment at a pre-defined interval of, say, on a monthly basis, rather than investing whatever is left on and off. Simply put, a disciplined approach eliminates uncertainty from investor’s investment process.

Although the number of investors investing in mutual funds has swelled in recent years, a large section of Indian investors has stayed away from this wonderful investment vehicle, thereby compromising their financial future. Then, there are investors who invest with a clearly defined time horizon in equity and equity-oriented funds, but get tempted to either reduce their exposure to this asset class or exit completely every time the market turns volatile.

As is evident, the lack of clarity on time horizon and volatile nature of the stock market creates certain dilemmas in the minds of investors. No wonder, they often feel compelled to make haphazard decisions. Investors must know that volatility is a natural phenomenon in the stock market and hence they must be prepared to stay invested during these volatile periods to benefit from true potential of this asset class that can help them earn positive real rate of return, i.e. gross returns minus taxes and inflation over the longer term. If you have been a little indecisive about your investments in equity funds, here is what can help you become a better investor.

SHOULD I INVEST MORE MONEY INTO EQUITY FUNDS NOW?

In the current market situation, there is always a temptation to increase allocation to equity funds. However, decisions made with intent to time the market can backfire as several domestic and global factors keep affecting the mood of the market over short and medium term. Therefore, rather than allowing market conditions to decide your investments, you must follow an asset allocation strategy. The right way to decide your asset allocation would be to follow a goal-based investment process, wherein your time horizon and investment goals become the main considerations for deciding how much should go into equity and how much into debt.

While debt funds allow you to earn higher post-tax returns than traditional options like fixed deposits and small savings schemes, equity and equity-oriented funds allow you to stay ahead of inflation over the long-term. Remember, a well-defined time horizon allows you to handle market volatility in a much better way as you don’t get tempted to take abrupt investment decisions.

SHOULD I MAKE CHANGES IN MY PORTFOLIO?

Considering that the stock market looks poised for a sustained rally, it is certainly the right time for investors to have a close look at performance and portfolio composition of equity funds in their portfolios. It is also the right time to rebalance the exposure to different segments of the market, i.e. large, mid and small-cap stocks. While the recent correction in the mid-cap segment provides an opportunity to increase the allocation to this segment for those who are under-weight, it is also time to pare exposure for those who have been investing heavily into this segment in the past couple of years.

Broadly speaking, a long-term investor should have around 30-40 per cent exposure to mid and small caps. Out of the total allocation to these segments, around 70-80 per cent should be invested in mid-caps and the rest in small-caps. Simply put, don’t look for excitement while investing in this asset class. If you don’t feel confident about making the right decisions, you must allow the professionals to manage your portfolio.

To sum it up, it is important not to get carried away by the euphoria in the market. At the same time, for a disciplined long-term investor, there are ample opportunities to benefit from the stock market’s new-found momentum.