The lesson is the same when trying to build a serious net worth for your family over the long term. We are all constantly bombarded with noise (unnecessary and unnecessary information), the challenge is to keep our focus on the controllable and emphasize what is relevant to our family.
The mutual fund industry has been flooded with equity NFOs (New Fund Offers) in the last few months, most of which have seen decent collections. The numbers have undeniably been aided by positive customer sentiment on the back of continued uptrend in equity markets. During the present times, the challenges lie in, a) Staying Strategic asset allocation (ie keeping it goal-driven), b) tempering expectations Return, c) continue with a long-term outlook on equity investments and, d) continue to undertake periodic reviews on the portfolio. Hence investment in NFO may not be required while building a portfolio. It doesn’t find anything unique to most investment tables. Existing funds can easily (and with transparent track record) meet future requirements as per the impending targets.
While building the portfolio on the equity side, be clear in investing the funds required to meet the goals of at least 6-7 years. As long as we keep investing in equity funds, the chances of earning money keep increasing. Also, keeping one’s investments over a period of time (one year or eighteen months) works better for volatile market conditions (largely the reality of equity markets). It is better for new investors to avoid sector/theme-based funds as they tend to have higher volatility and hence can be with higher returns than diversified equity funds. Between the categories- multicap and flexi cap funds, keep an eye on what they represent. While multicap funds are required to have at least 25% allocation each in large cap, mid cap and small cap stocks, the newly found flexi cap category will have to comply with investing at least 65% in equity instruments only and Freedom has to be enjoyed. Allocated in different ratios across different market caps. On the other hand, large and mid cap funds need to invest at least 35% each in large and mid-cap companies.
The decision to invest in multicap, flexi cap or large & mid cap category should not be based on current market conditions but on future goals and risk appetite. Alternatively, for a simple-to-understand equity asset allocation strategy, which is equally effective, if not more, one can consider allocating money in pure large cap, mid-cap and small cap funds . For a DIY investor, it is a good idea to invest up to 25-30% of the equity portfolio in mid-cap and small-cap funds. Large cap funds can be replaced with index funds, choose the one with less tracking error. Also, invest around 7-10% of your equity portfolio in international funds, this will help i) diversify meaningfully across geographies, ii) allow exposure to companies that may not have a presence in the country , and iii) it will benefit one. Rupee vs USD depreciation on yearly basis.
Ultimately, building an equity portfolio should be a function of one’s upcoming goals (their need and priority dates) and risk appetite. Moreover, the most worry-free way to build wealth over the long term is by maintaining trust, minimizing outside noise and investing diligently. In fact, the following peace quote beautifully sums up the appropriate attitude that we need to adapt to investing, “May God grant me the peace to accept the things I cannot change, the things to change.” Courage to do what I can, and wisdom to know the difference.” Investing is not about predicting returns, but about being prepared for every and any contingency, thus ensuring that money is a source of happiness and peace, not worry and heartburn. Achieving parity with money is not about the amount of money, but what it represents.
(The author is a founding partner of Srijan Financial Services LLP (MFD-Mutual Fund Distributor) and author of “Why Greed is Great!!!”.