Investors should participate in equity with realistic expectation

Updated: Apr 27 2008, 08:40am hrs
Rahul Jain of FE investor spoke with Srividhya Rajesh, portfolio manager, Sundaram BNP Paribas Asset Management, on building mutual fund portfolios. Excerpts:

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

Every investor must have a spread between equity and fixed-income investments. The proportion will depend on age, wealth, earnings, risk taking ability, time frame for attaining financial goals, and risk preferences. Today, even in the 50+ or 60+ age category, an allocation to equity is desirable, given the rising level of life expectancy. For the equity component, investors should have an allocation of at least 50%-60% to large-cap stocks with the share edging higher as years roll by. Young investors should have a sizeable allocation to mid-cap stocks. A 15-20% allocation to carefully identified thematic ideas may help boost overall portfolio returns. For the equity component, investors should take care not to mix insurance and investing in stocks, as outcomes will be inefficient. A simple term insurance and exposure to equity through mutual funds will be the optimal approach.

As far as the fixed-income part of the portfolio is concerned, a combination of liquid/liquid plus funds, fixed-term plans and post-office savings products may be appropriate. Investors should take care to ensure that their fixed-income portfolio does not idle in tax-inefficient and sub-optimal options such as bank deposits and corporate fixed deposits. There is no point in also locking into five-year fixed deposits though they qualify as eligible investment under Section 80C. Investors could use a combination of EPF/PPF and tax-saving products of mutual funds with a consistent track record across different time periods for Section 80C investments to save tax.

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

Themes that drive the long-term India story are infrastructure, changing energy landscape, rural prosperity, demographics, and outsourcing. The more attractive options are funds tracking infrastructure, rural prosperity and demographics. To play the demographics theme, financial services may be a superior option as compared to consumer products, where scope for excess returns is limited. The outsourcing theme may be significant from a macro-economy perspective, but it does not appear appealing from an investment perspective now. All such funds are meant for investors with a high-risk appetite and who already have a sizeable exposure to equity through large-cap and mid-cap funds.

The way equity market declined in January, tell us how should an investor go about investing in large-, mid-, and small-cap Why

Investors should have a spread across the cap curve. The broad thrust for allocation has been indicated in the answer to the first question. The market turmoil may be a good opportunity to buy into carefully-chosen funds focussed on large-cap and mid-cap spaces with a consistent track record.

Which type of debt fund is likely to perform comparatively better than the other debt funds in a scenario of high interest rate and tight liquidity position

Investors should stick to liquid/liquid plus type of funds and fixed-term plans till there is clarity on interest rates heading south.

Do you see similar kind of returns in the next three years, the way equity diversified schemes delivered over the last three years

Equity markets may not provide annual returns of 45% that investors enjoyed over the past five years. Going forward, returns are likely to be closer to the long-term average of about 16%-18% for large-cap stocks. Mid- and small-cap stocks could provide five- to seven-percentage points more. Investors should participate in equity with realistic expectation. To expect the magnitude of returns of the past three to five years may only lead to mistakes, unnecessary churn of portfolio, higher costs, taxes, and tension.

Could you enlighten us on what type of new schemes, if launched in the near future, can add value to the investors mutual fund portfolio, considering the plethora of schemes available in the market

Investors should target funds focussed on large-cap stocks, mid-cap stocks, and thematic ideas based on the pillars of the India growth story. The broad thrust of allocation has been indicated in the answer to the first question. New products that provide access to ideas not captured by existing funds may be considered based on the risk, return, and liquidity preferences of investors.