Financial Guidance - Consider risk adjusted returns
8/1/2011 4:18 PM Monday
Q - I have been following your column regularly. I wish to invest 20,000/- every month for 14-15 years. Can you help me choose 3 or 4 funds from the following? Also, do you think these funds offer diversification for wealth creation after 15 years?
- Reliance Regular Savings Equity
- Birla Sunlife Frontline Equity
Which of these should I select? Or would you suggest some other names? (I already have a yearly PPF of 70,000/-)
Answer - Ram, all the funds named by you are diversified in their approach, and hence suited for the long-term wealth creation plan that you have in mind. All of them invest in multiple sectors and currently have portfolio sizes between 20 and 80 stocks each. Since none of them are sector funds, they will restrict sector exposures as per SEBI norms and keep maximum exposure to any sector at 25%.
As you can see in the table below, all the funds listed are top quartile or just below top quartile performers on a risk-adjusted return basis, except for the Reliance Regular Savings Plan, which has fallen in its rankings in the last one year. I would suggest that you go in for one fund in each category for your SIP.
So, what is risk-adjusted return? Normally, one examines the gain over a period of time and is attracted to the fund that has delivered the highest gain. But what one should also be concerned about is the consistency with which the return is being delivered. A flash-in-the-pan performance is not desirable. Further, what is the risk (the path) that has been taken to deliver a certain return? By measuring these parameters and comparing the risk taken to return given, we arrive at risk-adjusted return, which we consider to be a better measure of efficiency than just returns.
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