Judicious allocation of assets holds the key

Fundmen's strategies for small investors - II

spoke to investment managers from brokerage houses on what strategies small investors should adopt.

The underlying constant that an investor should always be aware of is that disciplined and quantitative investing are a must to ensure steady and decent returns.

Shyam Bhat,
Assistant Vice President (investments),
Principal Mutual Fund:

Each investor should have a balanced asset allocation between debt and equity (whether through mutual funds or through direct investments) in accordance with one's age, income and risk appetite.

Younger people can invest in diversified equity funds, while middle-aged and senior citizens can look at income funds or monthly income plans. Considering the dynamic business environment, the risk associated with sectoral equity funds is quite high and, therefore, diversified equity funds could be a better option for an equity investor.

If a debt investor has a shorter time horizon in mind, the best is to opt for a short-term fund or a liquid fund.

Considering the uncertainty in the debt market, floating rate funds also appear to be a good option. Systematic investment plans provide a disciplined approach to investing, and protect investors from investing at a market peak, as and when it happens.

The sentiment in equities is improving, after the setback in May, and the Indian equity market has been one of the best performers among emerging markets in the last couple of months.

Foreign institutional investors (FIIs) have demonstrated their confidence in Indian equities.

More importantly, they have been net buyers of equity after the initial sell-off in the post-election scenario. This assumes significance especially in light of the larger selloff in most other emerging markets by some FIIs.

The state of the monsoon and high prices of international crude are concerns which do not appear to have been fully factored into the equity market.

A few quality stocks (large caps as well as mid caps), that are still available at reasonable valuations, are likely to do well going forward, while indices could remain range-bound after the recent sharp rally.

We could also see a resumption in the trend of initial public offers, some of which are likely to offer good value to investors.

Rajan Mehta, executive director, Benchmark Mutual Fund:
At Benchmark we believe that for any long-term investment, equity allocation is a must in a portfolio to beat inflation.

The question is how does a small investor take this exposure. Does one need to pick stocks directly or go through mutual funds? Stock picking requires time and does not guarantee superior performance.

Secondly, the risk increases owing to lack of diversification. Thus, investments through mutual funds are an ideal option for long term equity exposure. Another question arises, is that how does one select a particular mutual fund. Is it wise to select a fund based on its past performance or on the reputation and profiles of fund the managers?

Past performance is never a guide for future performance and fund managers, unfortunately, are not wedded to the fund. So what does one do?

World over many small and large investors have solved this problem by selecting index funds for taking long-term equity exposure.

One can make a lump sum payment or invest through a systematic investment plan. Now the Indian investor has enough options of selecting different indices through Benchmark products either open ended funds or exchange-traded funds.

Other truth about investing is that if one does not have discipline one end up investing at peak of the market when markets are exuberant and sell when markets are depressed. Disciplined or quantitative investing can solve this problem. 

Owing to this reason at Benchmark, we have selected indexing and quantitative investing as our core philosophies, which is backed by our in house product, Nifty Systematically Traded Portfolio, a quantitative model, which has a 12-year analysis.

Sanjay Santhanam, vice president, Sundaram Mutual Fund:
Asset allocation is one decision on which one must place a lot of emphasis. Bad investment decisions, it is said, arise mostly from bad asset allocation.

If, as investors, we get the asset allocation decision right, then we greatly reduce the chances of our investments turning bad. Following are the key guidelines for asset allocation. The more volatile the asset is in the short term, the better it will deliver over the long term.

Sundaram Keys to Optimum Returns, our proprietary study done across stocks ,bonds and money markets, shows that stocks deliver the best average returns over the long term, but also fluctuate the most over the short term.

Bonds and money markets have smaller fluctuations, but deliver lower returns over the long-term. Thus, the investment horizon is an important factor in deciding your asset allocation.

Comfort levels with fluctuations in the value of your portfolio during the investment period also determine asset allocation.

Your asset allocation is also governed by how much you want your money to grow. If you need to double your money in five years, it cannot be attained without significant equity exposure in your portfolio.