'A single sector will never be truly reflective of the entire economy'

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Sunday , April 27, 2008 at 0309 hrs Rahul Jain of FE investor spoke with Sivasubramanian KN, senior portfolio manager - equity, Franklin Templeton on building mutual fund portfolios. Excerpts:

How should one structure their mutual fund portfolio, considering the different types of categories available in equity and debt in case of both downside and upside trend?

We believe that investment strategy and asset allocation of an investor should not vary from year to year and be impacted by short-term market movements. Investors should draw out an asset allocation plan based on their risk profile, time horizon, and financial goals, and not on expectations of market movements in the near term.

Investors need to keep in mind that investments need to be considered within an overall financial framework based on their financial goals, risk profile, and time horizon.

Investors need to decide their asset allocation after a discussion with their investment advisors, taking into account their age, liquidity needs, existing portfolio, present and future earnings, risk profile, life goals etc.

The thumb rule for asset allocation is to have the equity allocation at 100 minus current age. Ideally, the portfolio composition should be determined by one’s personal situation and financial goals, and not market conditions

History has proven time and again that in fundamentally strong and growing economies, equity markets provide higher risk-adjusted returns over the long term.

Overall, investing through the systematic route would be ideal for investors as it will inculcate discipline and makes market volatility work for them.

From the sectoral/thematic funds, which fund do you think should perform better in the coming years? Why?

Sector/thematic funds are ideally suited for informed investors seeking growth in a time horizon of 3 to 5 years through investment in shares of well-managed companies with good prospects within a sector/theme. However, investors should look at these funds, as an add-on to enhance their overall return to an already diversified portfolio. These funds are not complete investment solutions.

Investors must remember that sector/thematic funds provide the opportunity to invest in one area of the market. But if that strategy is used as the sole means of achieving higher returns, the investor must be willing to take the risk that accompanies the possible return.