Should conservative investors avoid investment in equity MFs?
Investing in mutual funds has gained a lot of importance in recent years. Even SEBI (Securities and Exchange Board of India) has been tightening the rules to better protect investors interest. SEBI, in its RIA (Registered Investment Adviser) regulations have clearly stated that before recommending any products it is important to assess the investor’s risk profile. Many intermediaries have their own way of assessing risk profile of investors as there is no specific format recommended by the regulator (SEBI). So, some may make only 3 parts as to low, medium and high or conservative, moderate and aggressive. Some may divide it into 5 parts, very low, low, medium, high and very high or conservative, moderately conservative, moderate, moderately aggressive and aggressive. It is always wise to take into consideration the risk profile with 5 parts as it would be more near to your investment behaviour.
So, when investors find them conservative, they usually avoid investment in equity MFs, the reason being they don’t carry the capacity to digest risk. But should they really avoid investment in equities? It is wise to have at least 20 to 25 per cent in equity MFs. Now you may ask if the conservative investors cannot digest the risk from equities then why ask them to invest in equities in the first place? The reason is to beat inflation. Inflation risk is a systematic risk and cannot be avoided. However, historically equity MFs have beaten inflation by a good margin. If conservative investors only invest in debt then it would be difficult for them to cope with inflation. So to reduce the effect of inflation it is advisable to have a minimum of 20 to 25 per cent investment in equity MFs.
As a conservative investor, even while investing in equity MFs invest some amount in large-cap and some amount in multi-cap funds, who hold investment of 65 per cent or more in large-cap stocks. This will help you cope with inflation. That said, having a financial plan in place would even guide you further at a micro level as to where you should park your money.