Simple rules to make your portfolio work better

If you are following your money resolution for the year, keep up the tempo! We would like you to add a few more resolutions – if they are already not there – to make your mutual fund portfolio work better. Here’s a list. It’s an elementary one, but something we tend to disregard.

#1 Assess your risk
The answer to this is, most often, you cannot. Don’t be surprised. Yes, there is the thumb rule of hundred minus your age to invest in equities. But then, if a 30-year old wants no more than 40 per cent in equities, he hasn’t broken a rule!

There are many questionnaires, which try to categorise you as an aggressive, balanced or conservative investor. In reality, you may have an adventurous life but have no clue about your capacity to take risk in investments. Your capacity to take loss is also one other factor cited as a risk assessing tool. But you need to test waters to know how much loss you can actually take, as opposed to a hypothetical situation.

How else do you determine your risk appetite? If you do not subscribe to fancied theories, then the easiest way is to go by your timeframe. If you have a 10- year goal, asset class returns tend to normalize over this period – that is they tend to go through ups and downs and smoothen your returns overall. That means you have a greater leeway to invest in equities or other risky asset classes. Even then, there are no guarantees. To reduce the risks and uncertainty, you can move to safer investment avenues as you near your goal and not wait for the fag end of the term. In other words, with regular investing and rebalancing you can hope to reach your goal. There will be downfalls over this period. You will simply have to hold and invest through these periods. That’s the reality.

But if you have a say 2-3 year time frame, then you have lesser time to sit and hope the markets would have gone through full cycles. In this case, your appetite for riskier assets should be tempered more.

A near-term goal of less than a year means you simply need to keep your capital intact. Safe avenues that generate some returns and safeguard your capital should then be your route. That means you simply cannot take risks.

The choice and proportion of the asset class and the choice of your funds would be made based on this time frame-risk appetite equation.

#2 Be systematic
Once you are sure about your risk and timeframe, the only way to ensure you don’t jump the gun is to auto pilot your investments. Choose SIPs over lump sum investments for medium to long-term goals. An SIP works wonders in volatile phases and when market does not appear to move. For example, between the 30,000 levels of Sensex in March 2015 and the same level in April 2017, many funds would have managed just single digit returns had you invested as lumpsum. But your SIP returns would have been far superior. So SIPs move your funds even when markets seem to be staying where they are!

#3 Diversify
Yes, mutual funds diversify across stocks/instruments. But what if those stocks are focused on a particular theme or style? Diversifying across asset classes and across fund investment styles helps reduce risk. Equity, debt and gold complement each other well. So does a bunch of mid-cap, large-cap or balanced funds.

A 60:30:10 allocation in equity:debt:gold could have reduced your portfolio fall in 2008 to 23 per cent as against the Sensex (representing equities) fall of about 50 per cent. Similarly, you would have lost 5-10 percentage points lower by holding a combination of say equal money in large-cap, mid-cap and balanced funds than simply holding mid-cap funds. Diversify across asset classes in line with your risk profile. But remember, too much diversification across funds can dilute performance.

#4 Rebalance
Is it enough that you allocate money to equity, debt and gold and they stay put? The ratio will change as your money grows. And since some asset classes will outperform the others, your portfolio can go out of kilter. To rein it in, you may have to do an end-of-year review and rebalance the asset that has run up and add more to the asset class that has fallen. This will indirectly ensure you book profit on overvalued asset and redeploy it in undervalued asset.

#5 Review, but with care
Reviewing your fund does not mean chasing returns. If your large-cap fund underperformed your mid-cap fund, it could have been simply a bad year for large-cap stocks. Hence, compare with the fund’s own benchmark and similar category funds. Also, do not expect your fund to be at the top of performance chart every year. If they slip a bit in certain years and do not lag their benchmark by say 3 percentage points or more, you may not have to worry much. Do not exit in haste. When in doubt, stop your SIPs and watch for a quarter or two. Selling in a hurry may hurt returns besides possible tax and exit load implications. Exits will also spoil the chances of building your goal. Not comparing your funds with the market and peers, or simply worrying when your returns are not up to scratch will result in you exiting in a market like 2008 or 2011. You will miss the rebound the very next year. Stay rooted, if you know your fund’s performance is not below that of the market/peers.