I have been investing in mutual funds since 2006 and have used Value Research’s fund classification. I invested for the long-term and do not require the money now. The returns are around 34 per cent.
I want to know the best way to create a portfolio based on your classification. Should I remain invested or book profits? And, if I book profits, I would re-invest the money in funds, via SIP. Does it make sense?
- Deep Rastogi
The basis of the Value Research fund classification is to group funds with similar traits. So, traits of a large-cap fund and a mid- and small-cap one are clearly distinguished, though both are equity diversified funds. The fund classification, recently updated, brings in more objectivity when understanding what each category of funds hope to achieve.
The risk-return reward for each category varies and having an understanding of it helps allocate investments. The star rating is based on a risk-adjusted system and is the first filter in fund selection. A higher rating indicates good performance and one should ideally look for funds that have been consistent.
PORTFOLIO CHARACTERISTICS
These are a series of statistics that provide information about a fund vis-a-vis its benchmark. It also details the type of securities held by the fund and performance over time. This helps explain the fund performance in both absolute terms and relative to its benchmark. There is also the fund style box that depicts the portfolio's investment style, whether growth or value, based on the combined portfolio attribute of all funds. So, it is possible you may have selected funds with value as the goal, but the combined impact may have a growth tilt. The market-cap classification indicates large-, mid- and small-cap weightage and the valuation indicates the portfolio to be growth, value or blend.
GUIDING PRINCIPLES
Selecting a good fund is not hard if you can reverse the thought processes followed by most retail investors. Most investors hunt for high returns first and may even stop right there, inviting absolute disaster. Others go on to glance at risks involved, then make a cursory check of the expenses and finally think about how a fund fits in with their investment plans.
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By reversing that order, you can vastly improve the odds of finding the right fund. First, see what funds fit with your overall investment plan. The next-to-last thing most people do - but the second thing you should do - is to check the expenses you will incur. Returns fluctuate but expenses stay forever. Finally, look at risk. Even though funds issue a statutory warning that past performance is no guarantee to future performance, many disregard it. What goes up can come down just as rapidly. Ask yourself if you are prepared to stomach the losses if your fund's performance goes down. If the answer is “No”, look for another, less risky fund.
While you have indicated the allocation you have across different categories of funds, we are not sure on the number of funds you have. While diversification helps, it works best when done intelligently. Diversification depends on the kind of funds you own, not on how many you own. If you do not need the money and plan to invest it back into funds; you may be better off staying invested in the funds you have.
KEEP AN EYE
Stock prices change every day and so does its impact on your fund. A fund that is good today need not be so tomorrow. Also, the need for a category ends once the investment objective is achieved. What we say may appear a little time-consuming. However, once imbibed, it will become second habit to evaluate funds, build a portfolio and track its performance using the portfolio feature, making investing a pleasure. Tracking is very important and it should be done at least once a year to check the portfolio performance and make any changes accordingly if need be.
RISKS AND RETURN
At the cornerstone of any savings or investment plan is the relationship between risk and return. As a rule, the potential return on any investment generally corresponds to its level of risk. When creating a portfolio, it is imperative to understand the risk quotient of each fund type and invest accordingly.
INVESTMENT CHECKLIST
- Set a financial goal or an investing plan before you buy a fund
- Assess your risk taking ability and match it with the fund profile
- Track your investment periodically and make suitable changes by rebalancing the portfolio
- Don’t let short-term volatility guide your investment decision
| RISK-RETURN HIERARCHY | |
| Category | Suggested funds |
| Mid- & Small-cap Funds | DSP BR Micro Cap, HDFC Mid-cap Opportunities |
| Multi-cap Funds | Quantum Long Term Eq., ICICI Pru Dynamic |
| Large- & Mid-cap Funds | HDFC Top 200, BSL Frontline Eq. Plan A |
| Large-cap Funds | Franklin India Bluechip, IDFC Imperial Eq. Plan A |
| Hybrid Funds (equity-oriented) | HDFC Prudence, Reliance Regular Savings Balanced |
| Listed in descending order of the risk involved. Mid- and small-cap funds are most risky | |