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Equity Investments: Time To Make Some Key Decisions

| 1/10/2013 9:00 PM Thursday

While a rising market provides good opportunities for investment, you need to choose well and avoid hasty decisions, advises Hemant Rustagi.

KEY POINTS:

  • Investors often tend to invest in aggressive options like sector, thematic and mid-cap funds to make up for lost opportunities. However, they need to ensure that they not only invest in diversified funds but also deploy only long-term money at the current levels.
  • MFs offer a variety of funds, and each of them has a different level of exposure to different market segments. Therefore, the right way to measure the performance of a fund would be to compare it with that of the benchmark as well as the peer group.
  • A professional advisor has the expertise and resources to optimise your returns and can make a real difference to your portfolio.

The year 2012 turned out to be one for equities, contrary to the expectations at the start of the year. While all those investors who kept faith in equities are happy at this turnaround, those who have been waiting on the sidelines to invest at lower levels would be ruing the missed opportunity.

There are signs that the stock market is likely to continue its good show. The Nifty crossed the 6000 mark for the first time in two years after the US Congress passed the ‘fiscal cliff’ deal. The RBI’s credit policy and the Union Budget could provide the next triggers for the market.

Surely, there is a left out feeling among investors and some of them are likely to get tempted to jump onto the bandwagon at some stage. At times like these, investors often tend to invest in aggressive options like sector, thematic and mid-cap funds to make up for the lost opportunity. However, retail investors need to be careful while making investment decisions. They would do well to ensure that they not only invest in diversified funds but also deploy only long-term money at the current levels.

As is evident, a rising market can create a mixed feeling of fear and greed in investors’ minds. No wonder, while some investors end up investing aggressively in equities, others make a hasty exit in fear. As a result, they either end up losing a part of their investment or miss out on making gains in varying degrees, depending upon the timing of the exit.

Even those who continue to remain invested through this up-move could face a few predicaments. For example, it is quite likely that some of the funds in the portfolio might not be able to keep pace with the broader market. This could prompt investors to make abrupt decisions on the fate of these funds. However, investors should bear in mind that MFs offer a variety of funds, and each of them has a different level of exposure to different market segments. Therefore, the right way to measure the performance of a fund would be to compare it with that of the benchmark as well as the peer group.

The investment strategy/philosophy followed by the funds also makes a difference to how they behave in different market conditions. While sector, thematic and mid-cap funds tend do well in situations like what we see in the current market, they can be quite risky too. On the other hand, the large-cap and large-cap oriented diversified funds tend to slow down. Investors should not get tempted to make wholesale changes in the portfolio in a bid to capture higher growth over the short-term. The key is to maintain the right balance between risk and reward.

In the midst of all this, investors also need to decide on whether or not they need professional help for investing in mutual funds. Effective January 1, 2013, mutual funds have started providing a separate plan for direct investments, i.e. investments not routed through a distributor, for existing as well as new schemes. These direct plans will have a lower expense ratio excluding distribution expenses, commission, etc., and no commission will be paid from these plans. Accordingly, these plans will have separate NAVs.

While the step taken by the regulator would apparently be beneficial to investors, it would be appropriate for them to consider how they feel about handling their hard-earned money on their own. Though mutual funds are a simple mode of investing, they can be tricky as there are hundreds of funds to choose from and the skills and information required to select the right funds can be overwhelming.

Remember, a professional advisor can make a difference to your portfolio in more than one way. First, a professional advisor can take the emotion out of your investment process and help you stay on course. Second, an advisor can help you develop an asset allocation strategy in line with your investment goals, time horizon and risk profile. Last but not the least, knowing that a professional is managing your investment will help you focus on your professional and personal life.
Needless to say, you must be careful while selecting an advisor for yourself. But an advisor who has the expertise and resources to optimise your returns without exposing you to unwarranted risk is worth paying for.

Hemant Rustagi
CEO, Wiseinvest Advisors

 

Find More Articles on: DSIJ Magazine, In Focus, New To Markets, Investment Strategies, Markets, Product, Large Cap, PSU

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