Most of the Officers whom I have interacted with during the last few months are not happy with the performance of their investment portfolios. Ever since the onset of COVID -19 in Mar 2020, these 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 massive hit during the market meltdown in the month of Mar 20. The nifty benchmark index fell as much as 38% in a span of two weeks from an all-time high of 12300 to 7600.
In-depth analysis of these portfolios have revealed the following shortcomings :
- Asset Allocation. None of the portfolios I have analyzed has a defined asset allocation. Investments have been done in an ad-hoc manner without understanding the relevance and not linking them with financial goals. What actually is asset allocation? It’s a strategy that involves selecting a mix of investments (Equity, Debt, Real Estate, Gold, REIT, InvIT, etc) appropriate to investor’s 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. Chasing returns in debt funds can never be an objective. However, I found most of the debt mutual fund investments are in schemes with substandard investment profile, expected to give higher returns but susceptible to a credit default. You can read more on debt funds at https://letsinvestwisely.com/investments-in-debt-mutual-funds/.
- Hybrid Funds. Investment in hybrid funds solves no purpose; neither it can give 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.
- Evaluation and re-balancing of the portfolio. Periodic monitoring, evaluation, and rebalancing of the portfolio is an inescapable requirement, especially after such a massive bloodbath on Dalal Street. Investors who are managing their own portfolios should be able to do it themselves. But those Officers who are getting their investment portfolios managed through Banks/Advisory firms etc are finding it difficult to undertake this job either due to non-cooperation or lack of competence.
- Booking of losses due to sudden fall in the market. I have come across Officers who had booked losses because of the wrong advice given by their relationship managers, which in my opinion could have been avoided had there been an experienced and competent financial advisor holding their hand.
- Investment in close-ended schemes. There is no rationale to invest in a closed-ended scheme and blocking money 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, as it has happened in some debt funds in the recent past, the exit option is simply not there.
- 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 not so well established fund houses having the capability of generating additional Alpha.
- Design your investment portfolio as per the asset allocation and link investments with financial goals. There are better chances of achieving the goal(s)
- Always invest in debt funds with a 100% investment profile in AAA/A1+ rated instruments. Please remember debt funds are not meant for chasing returns.
- Avoid investing in long-duration debt funds now as the interest rates are already fallen a lot in the last two years
- One should always focus on risk rather than expected returns. Expected returns are difficult to forecast https://letsinvestwisely.com/understanding-investment-risks-before-investing/.
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