And haven't you heard financial experts advising investors to stay clear of the markets until election outcome is known?

Just weeks ago, when the Indian army conducted airstrikes on Pakistan, many of these experts felt war-like conditions will drag markets. So they advised investors not to commit money to the markets unless there was clarity on India-Pakistan bi-lateral relations.

We all know what happened thereafter.

Amidst all these forecasts and suggestions, the market is witnessing a pre-election rally. The Nifty 50 index has already rallied 5% from its February lows.

If this rally continues longer, the same experts might change their stance completely, for no change in India-Pakistan relations.

When there's polarity in the experts opinions, whom to trust is a big question, that too in an election year when every day can be full of surprises.

Is your mutual fund portfolio well-structured to handle even the worst market conditions?

The answer lies in whether you are following the right strategy while investing in mutual funds.

You should ignore brokerage houses and their views. They are the distributors of financial products or interested only in commissions. Hence their opinions can be biased.

Don't forget to ignore self-proclaimed experts as they won't own up to their inaccurate predictions.

You should also ignore all business channels that try to create sensations around even the smallest bit of news to increase their TRPs.

Basically, ignore all those sources of information and advice that elicit action as and when there's some change in the market conditions. As you know, markets are in constant flux.

Then whom should you trust?

Always trust the right investment strategies.

Have you heard of '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?

• To attain optimal portfolio diversification

• To stay away from all market noise without letting your portfolio suffer

• To offer greater stability to the portfolio and avoid unnecessary churning

• To benefit from the dual investment strategy

• 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 constituents in both 'Core' and 'Satellite' categories can make a huge difference in the end.

What matters most is the art of cleverly structuring the portfolio by assigning weightages 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

• 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.

• It should be diversified across investment style and fund management.

• Each fund should be true to its investment style and mandate.

• 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.

• Each fund should have seen outperformance over at least three market cycles.

• 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.

• Not more than five schemes should be managed by the same fund manager.

• Not more than two schemes from the same fund house should be included in the portfolio

Core and Satellite Portfolio in an election year

Don’t get swayed by the pre-election market rally. If results aren't in line with expectations markets will fall post-elections. However, in the long run markets are driven only by earnings and valuations.

Whether in an election year or otherwise, core and satellite portfolio can help you take advantage of any market condition.

For example, over the last one year midcaps and small caps have witnessed massive sell-offs. Despite this valuations at the index levels haven't dipped yet. Nonetheless, the gap in their valuations and that of large caps has reduced significantly.

Graph: Valuations cooling of in the mid and small cap space.
Cool time to invest?

​
Data as on March 09, 2019
(Source: NSE)

There's a possibility that some quality mid and small caps might are now trading at attractive valuations. If you avoid investing in mid and small cap mutual funds, you might not be able to capitalise on such opportunities.

Those who ignored large cap mutual funds in late 2017 anticipating mid and small cap funds to generate superior returns regretted their decisions in 2018.

In 2018, quality large cap funds held strong but most of the mid cap funds and small cap funds eroded the investors' capital.

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.

While you follow core and satellite strategy, don't forget to invest in mutual funds through Systematic Investment Plans (SIP) and opt for direct plans to maximise your gains.

Editor's note:  Are you looking for "high investment gains at relatively moderate risk"? We have a ready solution that could be suitable for you -- PersonalFN's Premium Report, "The Strategic Funds Portfolio For 2025( 2019 Edition)".

In the 2019 Edition of PersonalFN's Premium Report, "The Strategic Funds Portfolio For 2025", you will get access to a ready-made portfolio of its top recommended equity mutual funds for 2025 that have the ability to generate lucrative returns over the next 5 to 6 years. Subscribe now!

Add Comments