For many mutual fund investors, 2018 was a frustrating year; it tested patience. To the extent that, the ones who had raised queries at public discussion forums have started doubting their investment strategies.
Are you one of them?
This article will address your worries pertaining to market movements and rightness of your portfolio strategies.
Novice investors often get swayed with the recent performance of equity mutual funds. Going by the success of mid and small-cap mutual funds until 2017, many investors invested in them aggressively, albeit through Systematic Investment Plans (SIPs).
Unfortunately, due to the miserable performance of the small and mid-cap funds in 2018, the SIPs of many investors are incurring losses.
The same is true about investments in large-cap funds. Most of them have underperformed compared to the passively managed Exchange Traded Funds (ETFs).
Should you stop SIPs or continue investing in them for some more time?
[Read: Why You Should Not Stop Investing in Turbulent Times]
As you would know, SIPs work best when continued for the long term, say five years.
You shouldn’t discontinue your SIP if:
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You have invested in right mutual fund schemes
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Have been following the prudent investment strategy
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Invested in direct plans
If you are unhappy with the performance of any of your SIPs, perhaps, you aren’t following the three points mentioned above.
It’s high time to realise that past performance alone can’t be a criterion to select the mutual funds you invest in.
For instance, Rajeev is approaching his retirement, but he’s investing a majority of his savings in equity mutual funds, specifically in mid and small cap funds. This is a mistake.
You tend to make such mistakes when you don’t follow your personalised asset allocation.
A personalised asset allocation plan takes into account your, risk appetite, investment objectives, financial goals, and the time horizon before goals befall.
In the New Year, adopt a unique investment strategy while you endeavour to create wealth to accomplish your financial goals and stick to it.
If your personalised asset allocation guides you to invest, say 50% of your savings, in equity assets, following a unique strategy to allocate hard-earned money to various categories of equity mutual funds could prove worthy.
[Read: Which Equity Mutual Funds To Buy Now?]
Are you wondering what the strategy is?
It’s called ‘Core and Satellite’ strategy of investing.
The ‘Core and Satellite’ investing is a time-tested strategy to build your investment portfolio. For the mutual fund investors, the ‘core portfolio’ should consist of large-cap, multi-cap, and value funds, and the ‘satellite portfolio’ should include mid-and-small cap funds and opportunities style funds.
Why follow the Core and Satellite approach?
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To attain optimal portfolio diversification
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To offer greater stability to the portfolio and avoid unnecessary churning
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To benefit from the dual investment strategy
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To create wealth and curb the downside risk to the portfolio substantially
PersonalFN believes core holdings should form 60% of your mutual fund portfolio and the rest 40% should consist of satellite holdings.
Weightage of each portfolio constituent in both ‘Core’ and ‘Satellite’ categories can make a huge difference in the end.
So, what matters the most is the art of cleverly structuring the portfolio by assigning weights to each category of mutual funds and the schemes picked for the portfolio.
Unless you monitor your holdings and recalibrate the weights as per the market dynamics, especially for the ‘Satellite’ part of the portfolio, you may not derive the real benefits of the ‘Core and Satellite’ approach.
Rules for creating a strategic portfolio
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The selected funds should be amongst the top scorers in their respective categories. The portfolio should be built with a time horizon of at least five years.
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It should be diversified across investment style and fund management.
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Each fund should be true to its investment style and mandate.
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They should be managed by experienced and competent fund managers and belong to fund houses that have well-defined investment systems and processes in place.
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Each fund should have seen outperformance over at least three market cycles.
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The portfolio should contain an adequate number of schemes in the right proportion. In short, it should carry the most optimum allocation to each scheme and investment style.
The number of schemes in your portfolio must be limited to seven.
Remember…
While the ‘Core’ part of your portfolio focuses on the stable schemes with a long-term view and the ‘Satellite’ part revolves around capitalising on short-term opportunities. This unique combination helps you generate superior returns without taking excessive risks.
Creating a mutual fund portfolio following Core and Satellite strategy isn’t impossible for you, but it requires a different level of skill set. Also, you will have to dedicate time to do a thorough analysis.
Editor’s note:
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Happy Investing!
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