Personal Finance: Diversifying the portfolio to control market volatility | Bombay News
The coronavirus pandemic coupled with the upheaval in the stock market has forced many people to re-evaluate their mutual fund investments. Continued investments in mutual funds are the key to achieving high returns, although the fall in net asset values (NAVs) and market volatility in these unprecedented times have changed people’s outlook on debt funds and hybrids given their relative stability compared to equities.
That investments should be aligned with their goals is the mantra that guides any successful investor. Allocate, verify, adjust, unsubscribe, and readjust are simple steps you can take to ensure that every investment you make is aligned with your short and long term goals. Diversifying the portfolio is not a one-off task but involves a series of steps which can be repetitive. Here is where you start.
If you are a long-term investor, consider investing in mutual funds to earn above inflation returns and help you earn more. Adhil Shetty, CEO of BankBazaar.com, an online marketplace for financial products, said, “Mutual funds are a good investment if you have at least three years to stay invested. If you are investing in children’s education, a large cap or blue chip fund would be a good idea as they are less risky and offer returns in the range of 12-18%. The risks of erosion of the capital of these funds are also lower. Risk averseers can also consider hybrid debt-focused funds which typically earn between 8% and 12% depending on the fund. Many people also invest in safe government instruments that generate returns above the rate of inflation.
Choose your investments: Making the right choice of assets is a tough decision and ensures a good understanding of financial goals and risk tolerance. Mutual funds that perform in specific market conditions may not produce similar results when the economy is in the doldrums. The epidemic has shifted the focus from equity investments to blended investments comprising debt instruments and fixed income schemes. Equity investments fall into different categories including equity / equity investments, equity mutual funds, arbitrage systems and real estate funds. Debt instruments include bonds issued by companies, municipalities and various government sectors. Fixed income plans are primarily bank deposits consisting of savings accounts and money invested in deposits promising fixed returns.
Jayesh Faria, Managing Partner, Motilal Oswal Private Wealth Management, an investment and fund management firm, said: “Carry out a detailed personal risk profiling activity and arrive at an ideal asset allocation under the circumstances. and requirements. About 80% of the strategic portfolio needs to be allocated to stay invested all the time. The 20% balance can be considered tactically to seize the opportunity of market volatility. The open nature of mutual funds helps minimize an investor’s risk quotient, as the fund managers involved split the pooled amount into multiple stocks based on the investor’s subscription to the fund.
Simply diversifying funds between the market and those with fixed yields is not enough. You should also know how to diversify your allocations within your equity fund instruments based on fund availability and understanding risk versus return. Moreover, constantly owning several mutual funds without looking at their composition is foolishness. Instead, the focus should be on diversifying mutual funds based on their market capitalization. You need to diversify into different fund categories such as flexicap, midcap, small-cap and large & midcap. Even in debt instruments, pay attention to an appropriate mix of long-term, medium-term, and short-term debt funds for best results.
Package or SIP? The decision to invest a set amount in mutual funds or to pay for mutual fund investments in small installments has left many people in a dilemma.
Prashant Sawant, co-founder of Catalyst Wealth, a wealth management company, said: “SIP is a good option for today’s volatile market. Since this is a disciplined investment plan, it helps reduce the propensity for market fluctuations, cost averaging, and generate significant long-term wealth creation. Many investors are unable to decide whether to regularly invest in small amounts or wait for the right time to put their money on the market in a lump sum. Speaking about the factors that guide investment decisions in the form of lump sums or SIPs, Dr. Joseph Thomas, Director of Research, Emkay Wealth Management, a financial services company, says:, SIP has served to give access to funds for such investors, even with very small monthly investments which are well within the reach of the common man. Also, this mode is important because there is no need to worry about daily events in the market. It is a matter of common experience that in a very bullish market and a one-way movement, a lump sum will give you better returns. “
Diversification helps to bear the brunt of sudden bull market corrections or benefit from bear market rebounds. The stock market does not promise linear returns and hence it helps to enter the market gradually through small, regular investments over a long period.
Watch for Diversifications: Most people forget to check the performance of their investment portfolio. Once you have decided on your investment choices and diversified accordingly, it is important to monitor their performance and plan for the right step as well. This is because some mutual funds may not perform according to your expectations. Their ineffectiveness must translate into their relegation to the smallest part of the investment portfolio while more money can be allocated to the more stable and better performing. Check annual fund returns, dividend income growth and asset allocation to assess your fund’s performance.
Personal Finance is a weekly column that aims to provide our readers with relevant and useful financial information.