“Investing in mutual funds is not about predicting returns”
The lesson is similar when trying to build serious net worth for your family over the long haul. We are all constantly bombarded with noise (superfluous and unnecessary information), the challenge is to stay focused on the controllable and keep the focus on what is relevant to your family.
The last few months have seen a surge of NFO (New Fund Offers) shares in the mutual fund industry, most of which have seen some pretty decent collections. The numbers were undoubtedly helped by positive customer sentiment as the stock markets continued to rise. The challenges now are to: a) stay strategic on asset allocation (i.e. keep it goal-oriented), b) temper return expectations, c) continue to have a long-term view on equity investments and, d) continue with periodic portfolio reviews. Investing in NFOs may therefore not be a necessity when building portfolios. He usually doesn’t get anything unique at the investment table. Existing funds can easily (and with a transparent history) meet future needs in accordance with impending goals.
While building the portfolio on the equities side, be clear about investing the funds that will be needed to meet the goals for at least 6-7 years. The likelihood of making money keeps increasing the longer we stay invested in equity funds. Additionally, spreading your investments over a period of time (one year or eighteen months) works best for volatile market situations (largely the reality of equity markets). New investors should avoid sector / thematic funds as they tend to experience higher volatility and therefore might come with higher returns compared to diversified equity funds. Among the categories – Multicap and Flexi cap funds, pay attention to what they refer to. While Multicap funds must have at least 25% allocation each in large, mid and small cap stocks, the new Flexi cap class must only adhere to at least 65% investment in equity instruments and profit the freedom to be distributed among different market capitalizations in varying proportions. On the other hand, large and mid-cap funds should be at least 35% invested in each of the large and mid-cap companies.
The decision to invest in the Multicap, Flexi cap or Large & mid cap categories should not be based on the current market situation but on future objectives and risk appetite. Alternatively, for an easy to understand equity asset allocation strategy that is just as effective if not more effective, one can consider allocating money between pure large, mid and small cap funds. For a DIY investor, it is a good idea to limit exposure to mid and small cap funds to 25-30% of the equity portfolio. Large cap funds can be replaced with index funds, choose the one with low tracking error. Also, invest around 7-10% of your equity portfolio in international funds, this will help i) diversify significantly across all geographies, ii) allow exposure to companies that may not be present in country, and iii) it will help to benefit from depreciation of the rupee against the USD on an annual basis.
Ultimately, building an equity portfolio should be more a function of its impending goals (their need and priority dates) and risk appetite. Plus, the easiest way to build long-term wealth is to keep the faith, cut the noise out, and invest diligently. In fact, the following quote on serenity beautifully sums up the proper attitude we need to take to invest: “God grant me the serenity to accept the things that I cannot change, the courage to change the things that I can. and the wisdom to know the difference. ”Investing is not about predicting returns, but about being prepared for all eventualities, ensuring that money is a source of joy and peace, not anxiety and heartburn. Stomach Achieving equanimity with money is not a question of the amount of money, but of what it represents.
(The author is a founding partner of Srujan Financial Services LLP (MFD – Distributor of Mutual Funds) and author of “Why Greed Is Great !!!)