 "Balancing your mutual fund portfolio")
Everyone needs balance in their lives. So, too, do investors. They need a balanced portfolio - one that meets their goals. A balanced portfolio is one which encompasses a spectrum of investments, a range exposed to different asset classes, suitable to an individual, so as to avoid putting all one's eggs in only one basket.
One can go about doing this in various ways. For a layman, though, using mutual funds is a viable choice because of the wide range of options and the possibility of creating a portfolio suitable to specific requirements.
Overall options
Several choices are available. First, one needs to look at the options in the market to achieve one's objective. There are equity-oriented funds (which invest in large caps, mid caps and international funds), debt-oriented funds and gold funds. There is a huge range of debt-oriented funds, but exposure has to be considered as much depends on prevailing market conditions as well as the time frame available to an investor. The choice here would be stable funds, short duration ones and those open to interest-rate risk.
Equity funds
One area of focus has to be equity-oriented funds because these instruments provide growth momentum to a portfolio. Some large-cap funds in your portfolio act as a stabilising factor. For those who are slightly conservative, the extent of exposure to large-cap funds would be greater. For those looking for a balanced portfolio, overall equity exposure can be capped at around 45-50 per cent. This would comprise large-cap, mid-cap and, maybe, international funds.
For an aggressive investor, who wants stability in a portfolio, the proportion of mid cap-funds would be slightly larger as these are more volatile, simultaneously bringing in a higher risk element. In mid-caps, too, a longer period could elapse before an investor sees returns. This would need to be considered. These funds have a minimum time horizon of at least four to five years, which enables them to perform and show results. Those wanting to diversify their portfolios even further can set a small exposure of around 5 per cent to international equity funds. These offer a different flavour to a portfolio.
Stable debt funds
In the portfolio of an investor there is usually some exposure to fixed deposits. This can be easily replaced by mutual funds, within which are products similar to fixed deposits - Fixed Maturity Plans (FMPs). An investor should ensure that wherever s/he does not want the principal amount at risk and there is an element of surety in returns, the investment should be in these FMPs. The other option that can provide some element of regular returns are monthly-income plans, though since these have a small amount of equity they should not be considered as a sure source of income and hence should be used only for indicative purposes. The exposure to these two categories of funds in the overall construction of a balanced portfolio should be in the range of 20-25 per cent.
Other debt funds
There are other debt funds that would be used mainly to ensure that debt exposure is adequate. This has two components: a small part can continue in short-term or liquid funds to ensure that the money can be used to invest in some opportunity that suddenly arises. The extent of the exposure to this section in the portfolio should not be more than 5-10 per cent at any time.
Another 15-20 per cent should be in funds that actually enable an investor to gain from the movement of debt instruments in the secondary market. If prevailing interest rates are high and expected to slide in coming months, this should be directed towards income funds that are available for investment. However, when the situation concerning the future is uncertain, an individual would do well to choose dynamic funds, in which the fund manager ends up making the right choice about the kind of instruments suitable for investor gains. Once again, the overall aim of an investment is to ensure a steady rise in returns on this part of a portfolio.
Gold funds
The rest of the portfolio should go towards another asset class, namely gold, as this provides a different kind of exposure for an investor; it protects a portfolio from similar kinds of movements. This should not exceed 10 per cent of the total value and should be slowly built up over time. The real gain to an investor is when s/he considers gold funds as long-term investment assets and s/he has invested in this when prices have corrected. This would enable her/him to accumulate various units when the going is tough so that when prices actually go up s/he is ready to earn returns. This calls for an element of patience because the asset cycle is longer than one sees with other asset classes, often running for over 10 years in a specific direction.
Overall
Many options in mutual funds are available. It is the responsibility of each individual to check what is appropriate as they go about creating their own balanced portfolios. Utilising the right mix would be beneficial; even more important is the need to ensure regular re-balancing.
One can go about doing this in various ways. For a layman, though, using mutual funds is a viable choice because of the wide range of options and the possibility of creating a portfolio suitable to specific requirements.
Overall options
Several choices are available. First, one needs to look at the options in the market to achieve one's objective. There are equity-oriented funds (which invest in large caps, mid caps and international funds), debt-oriented funds and gold funds. There is a huge range of debt-oriented funds, but exposure has to be considered as much depends on prevailing market conditions as well as the time frame available to an investor. The choice here would be stable funds, short duration ones and those open to interest-rate risk.
| USE MFS TO CREATE A BALANCED PORTFOLIO |
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Equity funds
One area of focus has to be equity-oriented funds because these instruments provide growth momentum to a portfolio. Some large-cap funds in your portfolio act as a stabilising factor. For those who are slightly conservative, the extent of exposure to large-cap funds would be greater. For those looking for a balanced portfolio, overall equity exposure can be capped at around 45-50 per cent. This would comprise large-cap, mid-cap and, maybe, international funds.
For an aggressive investor, who wants stability in a portfolio, the proportion of mid cap-funds would be slightly larger as these are more volatile, simultaneously bringing in a higher risk element. In mid-caps, too, a longer period could elapse before an investor sees returns. This would need to be considered. These funds have a minimum time horizon of at least four to five years, which enables them to perform and show results. Those wanting to diversify their portfolios even further can set a small exposure of around 5 per cent to international equity funds. These offer a different flavour to a portfolio.
Stable debt funds
In the portfolio of an investor there is usually some exposure to fixed deposits. This can be easily replaced by mutual funds, within which are products similar to fixed deposits - Fixed Maturity Plans (FMPs). An investor should ensure that wherever s/he does not want the principal amount at risk and there is an element of surety in returns, the investment should be in these FMPs. The other option that can provide some element of regular returns are monthly-income plans, though since these have a small amount of equity they should not be considered as a sure source of income and hence should be used only for indicative purposes. The exposure to these two categories of funds in the overall construction of a balanced portfolio should be in the range of 20-25 per cent.
Other debt funds
There are other debt funds that would be used mainly to ensure that debt exposure is adequate. This has two components: a small part can continue in short-term or liquid funds to ensure that the money can be used to invest in some opportunity that suddenly arises. The extent of the exposure to this section in the portfolio should not be more than 5-10 per cent at any time.
Another 15-20 per cent should be in funds that actually enable an investor to gain from the movement of debt instruments in the secondary market. If prevailing interest rates are high and expected to slide in coming months, this should be directed towards income funds that are available for investment. However, when the situation concerning the future is uncertain, an individual would do well to choose dynamic funds, in which the fund manager ends up making the right choice about the kind of instruments suitable for investor gains. Once again, the overall aim of an investment is to ensure a steady rise in returns on this part of a portfolio.
Gold funds
The rest of the portfolio should go towards another asset class, namely gold, as this provides a different kind of exposure for an investor; it protects a portfolio from similar kinds of movements. This should not exceed 10 per cent of the total value and should be slowly built up over time. The real gain to an investor is when s/he considers gold funds as long-term investment assets and s/he has invested in this when prices have corrected. This would enable her/him to accumulate various units when the going is tough so that when prices actually go up s/he is ready to earn returns. This calls for an element of patience because the asset cycle is longer than one sees with other asset classes, often running for over 10 years in a specific direction.
Overall
Many options in mutual funds are available. It is the responsibility of each individual to check what is appropriate as they go about creating their own balanced portfolios. Utilising the right mix would be beneficial; even more important is the need to ensure regular re-balancing.
The writer is a Certified Financial Planner