The other day you heard about mutual funds, today you are thinking of investing in them. The first question that pops up in your mind is, which strategy to go for — pick individual funds or build up a separate customized portfolio? Quite a dilemmatic situation it is for the rookies in the investing field. Before clearing the air and letting you know which of the two strategies is gainful for new investors, I would first like to explain the subtle difference between them.

Investing in Individual Funds Vs Separate Portfolio

Investing in individual funds is mostly followed by DIY (Do It Yourself) approach and sometimes financial advisors do play their roles too. Investors must know their investment objective, risk profile, and tenure prior to investing. And, after determining these crucial parameters, the person can choose the fund category, and then hop on the scheme he wants to invest in. The individual funds’ capability of providing higher returns is the most prominent reason that lures the novice investors. So, regardless of what the objective of the fund is, who the fund manager is, and what’s the investment style of the fund, beginners tend to concentrate more on the returns part.

Contrarily, if an investor opts for a portfolio building, then he has to describe his risk profile and tenure to the portfolio manager. The portfolio manager selects the categories, decides the percentage allocation, and builds the efficient portfolio that has a concentration on obtaining high reward to risk ratio by adjusting the investment in schemes accordingly. This separate portfolio is well diversified and does not have concentrated bet on a single fund. Beginners who do not have time and prior knowledge of the schemes prefer hiring a financial adviser and get the portfolio made by the expert.

Examples to Comprehend the Strategies

Scenario 1- Individual Funds

Suppose, you’re 30 and want to invest in mutual funds with a long-term perspective in order to build an appreciable corpus in future to fulfill the personal goals. Although you’re an amateur investor, you favor stomaching high risk lured by the high risk-high return game plan. So, you decide to invest in equities of a scheme belonging to small-cap space. You might know very well how volatile small and mid-cap funds are. Now, because you are a neophyte at investing, the fear of losing principal haunts you day and night. The lack of understanding of ‘buy and hold’ investing strategy of the fund manager distresses you during the market lows and as a result, you end up redeeming your investment, leaving a huge hole in your pocket.

Scenario 2- Separate Portfolio

On the other hand, you are 30 and new to investing, so you think of handling all the responsibilities to a professional financial expert. You describe him your investment objective and other details — high risk capacity with a long-term horizon. The portfolio manager suggests you an aggressive portfolio with 60% allocation to equity schemes, 20% in balanced schemes and the remaining in debt schemes, thereby making the portfolio diversified. Now when the market hits low, you need not worry about losing your principal as if one scheme or the category incurs loss, the other will average the loss by earning appreciable return.

Which Is the 24-karat Choice You Should Sift Out?

Finally, going through both the instances above, you would have yourself analyzed that investing in individual funds is valuable for those who are experienced and accustomed investors. But, according to the experts, rookies should prefer opting for a separate portfolio which is well designed by financial experts and portfolio managers.

It’s because when you have a highly qualified and professional portfolio manager managing your investments, then all you have to do is ‘Set It and Forget It’. This means, select the schemes, get the portfolio ready, start investing and hold on to it until the true worth of your investments is unleashed. These trained and talented portfolio managers work on optimal allocation of the schemes according to their specific roles and assure that they complement each other. For instance, there could be three funds in a portfolio, of which one realizes gain and the other two ensure stability.

There’s a famous adage that says, ‘Risk is not in the car, it is the driver behind the wheel.’ As a concluding note-cum-advice, one must have complete knowledge before choosing to invest in individual funds and the capacity to handle all the roller coaster rides of market’s lows and highs. And if you do not have time and awareness of how to invest, you must seek assistance from the financial experts and get investment portfolio made in order to diversify the investment and pocket in risk-adjusted returns.

(By Virendra Singh Ranawat,Group Co-founder, MySIPonline.com)