Rethinking Your MF Investment Strategy

Mutual funds offer investors a good opportunity to make gains from the market, but having an investment strategy aligned to one's life goals is crucial. It’s time to revisit your investment decisions and look at MFs differently now, says Hemant Rustagi.

KEY POINTS:

• Investing through MFs is definitely a good idea, especially for those investors who may not have the wherewithal to invest directly in the equity or debt market. The key is to make the right selection, follow a disciplined approach of investing and employ different strategies to get the best out of different asset classes.
• New investors must begin their investment process by defining their investment objectives as well as deciding on their time horizon. During the initial stages of portfolio building, the focus should be on those diversified funds that have an established long-term track record.

In today's complex financial world, making investment decisions can be quite a challenge. Unfortunately, even a versatile investment option like mutual funds (MF) has failed to find a permanent place in individuals’ investment universe. In fact, MFs offer a variety of schemes to suit the different needs of investors. Therefore, it’s time for investors to change their perceptions about MFs and make them an integral part of their portfolio. Here are a couple of typical situations faced by investors with regard to MFs and how they can be handled:

I have lost money in MFs earlier. Should I invest again?

If you are one of those investors who have had an unpleasant experience in the past and have stayed away from MFs ever since, you need to think again. No doubt, many investors have suffered over the years due to a mismatch between reality and expectations, poor performance of funds, mis-selling and by not giving enough time for their investments to grow. However, the fact remains that investing through MFs is definitely a good idea, especially for those investors who may not have the wherewithal to invest directly in the equity or debt market. The key, of course, is to make the right selection and follow a disciplined approach of investing.

Besides, one requires different strategies to get the best out of different asset classes. For example, equity fund investments are for the long term, and hence, one must have the patience to wait out the turbulent times. Trying to time the market with equity funds can be a futile exercise. Many investors who try to do so end up making the classic mistake of buying high and selling low. Remember, a long-term investment approach can make life easier for you. So, go ahead and enroll yourself for an SIP and begin your process of wealth creation now.

I have a lump sum amount that I wish to invest. How should I deploy this money?

Many investors face this dilemma time and again. While investors who have an investment plan in place can invest the money as per the plan, it can be a difficult task for those who do not have one. For them, the prevalent market conditions often override all other factors No wonder then, that many investors end up acting imprudently when faced with such a situation.

While on the one hand, a volatile or a depressed stock market prompts investors to take refuge in the safety of traditional instruments, a rising stock market, on the other hand, encourages them to adopt an aggressive strategy. Both these extreme approaches can be harmful to their long-term interests. An extremely conservative approach can negate an investor’s inflation hedging capability, whereas an aggressive investment strategy can expose investors to the risk of losing a part of their capital itself.

Therefore, new investors must begin their investment process by defining their investment objectives as well as deciding on their time horizon. During the initial stages of portfolio building, the focus should be on those diversified funds that have an established long-term track record.

As regards the strategy to invest a lump sum, if one is looking to make a one-off investment, it would be prudent to invest half the money as a lump sum and the remaining half through a Systematic Transfer Plan (STP). Under an STP, the money can be invested in an ultra short-term debt fund and then transferred at a pre-determined interval, say on a monthly basis, into a pre-decided fund. This approach would help investors avoid the mistake of committing too much money at a particular market level.

However, if one is reasonably sure about investing in an equity fund on a regular basis, even if it is not at a short interval, one can go ahead with a lump sum investment without worrying too much about the market level. Similarly, if the intent is to invest in a debt or debt-oriented fund, one can invest a lump sum at any time. Of course, the key is to choose the right kind of fund, i.e. ultra-short, short-term or income fund, based on one’s time horizon.

The key point to remember is that one must expect realistic returns in line with the asset mix in one’s portfolio. This will go a long way in maintaining the right balance between risk and reward.

Hemant Rustagi
CEO, Wiseinvest Advisors