MF Portfolio Games And Gains

Written by Rahul Jain | Updated: Apr 27 2008, 07:21am hrs
Two years ago, under the guise of wealth management, several firms, even the most reputed banks, offered their services. All you had to do was pledge a certain sum, usually above Rs 15 lakh, and you would have a dedicated relationship manager who would offer you advice - for free. While the going was good and as the markets shot up, the creed grew. After all, any bet would yield results. Now that the markets have corrected, many of these relationship managers are not to be seen around. I am saddled with several funds that I am not aware off, says Rakesh Jhamb, a senior executive in a multinational fund. And he is not alone.

There are several who fell to the guile of wealth managers (see page IX for more) who have advised people to buy into certain mutual fund schemes just because their commissions were high. The business model for free services meant that earnings were made from these commissions, which could be as high as 7% of the funds.

With the inflation numbers rising, tax is getting difficult to manage, and the stock markets being rather lack lustre, your returns could now be turning negative. Mutual fund investments, could actually act as a solace for your portfolio. Select diversified funds, arbitrage funds, and gold exchange traded funds have actually returned positive numbers.

Usual care

Clearly, there are questions to be asked about such lousy advisory services. But then the caveat emptor or buyer beware factor always persists. And the age-old norm of one size fits all does not work here.

You must be clear of your investment objectives before you commit funds, clichd advice that is surely worth repeating. I have seen 80% of my clients not asking me about the riskiness of funds they are buying into. Girega nahin na bhai (hope it will not fall) is what they seem to ask, says Steven Colaco, an advisor and distributor. This is the level of apathy present amongst investors. And most of them are extremely well educated and hold high posts.

Another mistake committed by many investors is one considering the time frame of a desired portfolio. Being clear about this factor will help you decide the proportion of equity-debt in your portfolio. The portfolio construction depends on the financial goals of the investor. For seen to eight years, investors can go for a higher share of equity and if it is for two to three years then having a debt portion is always a better option advises Gaurav Mashruwala, a reputed financial planner.

While experts reckon that you should be doing a periodic review, at least quarterly, of your portfolio and matching them with your priorities and demands, there are some funds that you dont want to look at for a long time. In such cases, a large-cap fund works best. Funds that pick reputed large-cap companies might then be the right choice for you.

Mainly the company they invest are large and fundamentally strong with a proven track record. But diversified large cap would give stable and lower returns than mid- and small-caps. However, they are risky and have more downside risks than large-caps. So some proportion should be devoted to mid- and small-caps to get higher returns.

And this is seen in the recent market crash when the mid- and small-caps declined by around 50% to 60% and large caps were down by 30% to 35%. And large-caps take less time to recover. If one wants to go aggressive and higher, a proportion can be given to mid- and small-caps.

Thematic funds

If you see, in the past, there have been a plethora of thematic funds that are dedicated to a particular sector. In the last year the outperformer were the capital goods and power sector. We have seen lot of infrastructure funds come in the market before one and half years and they had given good returns. The underperformers were FMCG, auto and pharma sector. However, these sectors that once gave good returns, might not have the same promise now. The dynamics of sectoral funds keeps changing. And therefore they require to be tracked carefully.

There was a time when capital goods sector funds started to show higher growth and attracted attention. And now when the market is going down, FMCG and pharma sectors, the defensive sectors, which are more stable and predictable are getting more attention. One has to keep actively monitoring the portfolio because all sectors do not do well all the time says Mihir Vora fund manager HSBC mutual fund. There are few funds in some of the thematic categories, which give positive returns to investor irrespective of the market condition by dynamically adjusting the portfolio to the current market situation.

The most important factor to remember, Sector or thematic funds are ideally suited for informed investors seeking growth in a time horizon of three to five years through investment in shares of well-managed companies with good prospects within a sector or theme, says KN Sivasubramanian senior portfolio manager - equity with Franklin Templeton. Investors should look at these funds as an add-on to enhance their overall return to an already diversified portfolio, he adds.

One can keep also look at index funds, which are replica of the index on the stock exchange like Sensex and the Nifty. The index fund is a sensible, serviceable method for obtaining the markets rate of return with absolutely no effort and minimal expense, says Burton G Malkiel author of A Random Walk Down Wall Street and professor of economics at Princeton University.

The one who is risk averse to take exposure in index futures or options, can invest in index mutual funds as they move in a more or less similar fashion like the index on the exchange. Investors have also got the opportunity to invest globally but with a limit of 35% of the total fund size. However, one should remember that the returns globally might be lower than the domestic returns. This investment could be considered for hedging purposes if the domestic market comes down.

The second and the last broad category after equity is debt. In case of the debt category there has not been much addition except a couple of products like fixed maturity plans (FMPs), monthly income scheme (MIS).

Ideally debt investments are safer but give much lower returns than equity because debt funds invest in government securities (Gilt), corporate bonds, money market instruments, debt paper, fixed deposits, etc. Every debt product has got a tenure attached to it. And depending on that there are long-, short-, and medium-term debt schemes.

Others are gilt, liquid, fixed maturity plans, and monthly income schemes (MIS). Investors can expect 4 to 9% from debt schemes per annum depending on the schemes also. The liquid schemes objective is to provide liquidity with 4% to 5% returns higher than the savings account interest of 3.5%. There are schemes like (FMPs) with fixed tenure from 90 days to 3-years. This gives fixed yield of 8% to 9% per annum and the redemption happens after the expiry of the scheme.

FMPs look attractive in the current interest rates scenario because investors can lock-in to fixed deal. However, one can buy bonds fund after one or two quarters when we see interest rates softening says Vora.

Now as the markets volatile and unstable, it is better for investors to go in for a systematic investment plan (SIP), irrespective of what fund you choose, as investors may not get the upside at least in the short-term period.

So it is better to invest in staggered form and average your investment cost over the period for instance one to two-year. One should also understand that investing for short-term period higher proportion in debt is better because of stable returns. But for the long-term, equity should always be given a higher share.