During my interactions with officers in the last few months, I have found that most of them are not happy with the performance of their investment portfolio. Ever since the onset of market volatility after most of the benchmark indices, including Nifty 50, made a lifetime high in Oct 2021, portfolios have shown great vulnerability towards financial market volatility. Not only equity investments, either directly or through mutual funds, but debt mutual funds also took a hit during the same period as the interest rates started moving up.
An in-depth analysis of these portfolios has revealed the following:
- Asset Allocation None of the portfolios I have analyzed have a defined asset allocation. Investments have been made in an ad-hoc manner without understanding the importance of asset allocation or linking the investments with financial goals. What is actually meant by asset allocation? It’s a strategy that involves selecting a mix of investments (equity, debt, gold, REIT, etc.) appropriate to investors’ risk tolerance, time horizon, and financial goals. It is an effective way to help manage risk in the investment portfolio.
- Debt Funds Investments in debt mutual funds are planned to mitigate the risk and provide stability to the portfolio, especially during an economic crisis. Investments in debt funds are governed by credit quality (safety of principal and interest) and the duration (interest rate cycle). During the interest rate rising cycle, it is advised to deploy money in shorter-duration debt instruments. However, I have found that most of the debt mutual fund investments are in schemes with longer-duration bonds and low-grade debt instruments. It’s essential to have investments in high credit quality debt instruments, and duration needs to be decided with a clear understanding of how the interest rate cycle will play out.
- Hybrid Funds Investment in hybrid funds serves no purpose; neither can it give the full potential of equity appreciation nor can it protect the portfolio from downfall during market corrections. The better option would be to go for equity and debt mutual funds separately based on asset allocation. However, to take benefit of taxation on long-term capital gains, aggressive hybrid funds with more than 35% equity investments may be looked at.
- Evaluation and re-balancing of the portfolio Periodic monitoring, evaluation, and rebalancing of the portfolio is an inescapable requirement, especially during such market volatility. Investors who are managing their own portfolios with adequate knowledge of market behaviour should be able to do it themselves. But those officers who are getting their investment portfolios managed through banks, advisory firms, etc. find it difficult to undertake this job. It could be either due to non-cooperation from these agencies or lack of competence on their part.
- Booking of losses due to sudden fall in the market I have come across officers who have booked losses because of the wrong advice given by their RMs. This, could have been avoided had there been an experienced and competent financial advisor holding their hand and giving them the right outlook on the markets. Market volatility provides a good opportunity to invest and not to sell the investments.
- Investment in close-ended schemes There is no rationale to invest in a closed-ended scheme. The money gets blocked for three to five years. Locking the money in such schemes is not going to generate additional returns. On the contrary, money gets stuck, and should something go wrong with the scheme the exit option is not there. This has happened in some debt funds in the past,
- Making a portfolio on hearsay. Many officers have made their portfolios based on the recommendations of somebody. It could be friends, colleagues, social media, TV, etc. They do not go through the nature of the business, financials, quality of management of the company, and investment profile of mutual fund scheme(s). These investments do well as long as the markets are doing well. They perform badly once the markets start to correct. For more, you may go through my article here
- Asset allocation based on the risk profile, time horizon, and financial goals is an important aspect of the investment portfolio.
- Link investments with each of the financial goals. There are better chances of achieving them.
- Always invest in debt funds with a 100% investment profile in AAA/A1+ rated instruments. The duration of the debt fund plays an important role in deciding the yields (return on investments)
- Investment in brand names In Hindi, there is a proverb, “Unchi Dukan Fheeka Pakwan“. Established, big fund houses may not meet the desired investment objectives. Instead, look for less well-established fund houses that have the capability of generating additional Alpha.
- Always review your portfolio at least once a year to make mid-course corrections, if required.
- If you find it difficult to manage the intricacies of investments, there is no harm in taking the advice of a certified financial planner.
Need to talk more about this or do want to get your portfolio reviewed? Please feel free to book a no-charge consultation with me at this link. (https://calendly.com/rakeshgoyal). Confidentiality is assured.
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