How to build investment portfolio: Here is why you should keep it simple

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Published: September 12, 2017 5:13:38 AM

Investing in any asset class needs to be simple. Simple to understand, interpret and execute.

investment, investment portfolio, build investment portfolio, how to make investment portfolio, not-so-new investor, investment productsInvesting in any asset class needs to be simple. Simple to understand, interpret and execute. (Image: Reuters)

Investing in any asset class needs to be simple. Simple to understand, interpret and execute. However, what comes across for a new entrant or for that matter even the not-so-new investor, is the complexity in the investment products across the investment horizon.

Plenty of schemes

Even for a simple mutual fund investment, there are multiple schemes. First, the schemes are classified as debt or equity or hybrid. Even within these, the debt schemes have various categories as in liquid, liquid plus, ultra-short term, gilt, accrual, duration, corporate bond. If these were not enough, in equity schemes there are large-cap, small-cap, mid-cap, multi-cap, equity-linked savings scheme, thematic funds. Hybrid is typically a mix of debt and equity, which again results in balanced fund and monthly income plans with multiple debt and equity mix. As an investor, when you have to choose from such a range offered by 42 mutual fund houses with over 2000 schemes, most of the time, the choice of investment becomes sub-optimal. And again, as an investor, we rush towards investing into the best performing one from the one-year stable, not understanding that the return has run up and there may not be much steam left in it. But then, that’s how the bias in investing is.

Schemes in a portfolio

Now having mentioned about the choice overload, how many schemes do you need in your investment portfolio? Not more than five to six. What happens typically is that you invest first and then do the legwork called ‘research’. Do the research first and then do the investment. Another observation is that as investors, we are more comfortable when our peers also invest in the same scheme, as if the markets would perform because of the sheer strength in investor numbers.

Keep it simple

Keeping it simple is the portfolio construction method. To meet your cash flow needs, you need liquidity and protection of capital. What it means is that when you forsee a liquidity requirement, the redemption amount should not erode the original capital invested. It makes sense to invest in one liquid fund scheme as multiple schemes are not required. One should not invest for the sake of diversification. More we diversify, more the portfolio resembles the same, except for the names of the scheme which are the only thing which is diversified.

Long-term requirement

For you cash flow requirements, which are for over 10-15 years, choose an equity scheme with vintage, consistency in fund manager, lower turnover of portfolio with consistent performance over multiple time periods. Not more than two such schemes are required. Track the performance every quarter or once every six months with its peers and check where it stands for any rebalancing or revisiting the investment .
Medium-term requirement

For your requirement between 3-10 years, a combination of balanced and large-cap equity scheme should serve the purpose. Each of the fund houses have schemes in typically every category. Diversification does not mean investing in each of the schemes of every fund house. Doing the research and choosing one or two of the performing schemes across multiple periods should be the approach.

Based on your time horizon and liquidity needs and anticipated returns, a portfolio with 5-6 schemes can be built. It needs your acceptance that ‘less is more’. Monitoring the portfolio also becomes manageable. Having fewer schemes, does not mean that you do not do due diligence. It only means that you are on the path to achieve your investing goals with fewer investment schemes. Having a monitoring discipline coupled with your investment policy statement should be the approach.

The author is managing partner, BellWether Advisors LLP

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