Riding the equity wave

Smart Investing Through Mutual Funds

The bulls are staging a comeback with retail investors following suit. The unprecedented oversubscription in the case of Maruti Udyog's initial public offer, is indicative of the retail investor's willingness to re-enter the stock market.

For those investors, who are still wary but wish to ride the equity wave, mutual funds are the right vehicle.

According to Alok Vajpeyi, president, DSP Merrill Lynch, equity investments are more rewarding in the current scenario compared with last year.

Although mutual funds are largely said to follow the bumpy ride of the markets, a judicious allocation of funds in investors' portfolio can diversify volatility to an extent.

Investment companies offer tailored schemes and advice suited to individual investors' needs and choices.

Fund allotment is a critical and vital matter and should be handled with utmost prudence. As Vajpeyi reccomends, "Investment in equities has dismayed many in the short term, but if executed in an rational framework, may help in better choices."

First and foremost it is imperative to identify the objective of the investor. Based on the purpose of the venture, and the basic attitude towards risk of the investor, decisions regarding selection of investment plans can be made.

On the basis of their risk profiles, investors can be broadly categorised as conservative, moderate and aggressive.

Of course, unfavourable movements of the market may even dissuade the most aggressive, but as a thumb rule, the basic approach towards risk should be borne foremost.

For those who believe in stability, in other words, those investors who wish to take minimum risks, fund managers ideally advise a portfolio dominated by fixed investments. Generally, people who are close to retirement or are over 65 fall in this category.

"For the risk averse category, equities should form a small component of the funds portfolio", Vajpeyi says. Here expectations of returns should be proportional to the willingness of taking risks.

Ved Prakash Chaturvedi of Tata TD Waterhouse says, "Investments in equities is beneficial when the time horizon is about three to five years." He adds that risk-averse investors should balance their funds through investments in other assets.

There are some investors who, in spite of their conservative approach to risk, wish to invest in equities. They must choose stocks which are predominantly defensive in nature. Here again, the atmosphere of the market plays a part.

As Rajat Jain, chief investment officer, Principal Mutual Fund says, "It is not always stocks which are defensive or growth based, but the attitude of people. But in the long term, equity outperforms other assets by a few percentage points".

The sectors recommended by Vajpeyi for this category are fast moving consumer goods and pharmaceuticals.

Mainly the age group of 35-45 fall in the category of risk-neutral investors. People, who have financial commitments toward their families and at the same time hope to build a nest for their old age, have the option of choosing investment plans which offer a diversified portfolio.

Vajpeyi says, "Given the current market conditions, a moderate investor could invest up to 60 per cent of his funds in equities". Textiles, cement, automotive and such other cyclical stocks are recommended in this category.

According to Chaturvedi, mid-cap stocks should be picked for this type of portfolio. Often, fund managers suggest blue chip stocks for risk-averse investors as these stocks are relatively less volatile.

Mid-cap stocks are recommended for investors who are prepared to assume a certain measure of risk. Vajpeyi says, "In the mid-cap section, companies with an annual turnover of more than Rs 500 crore have a lesser amount of risk associated with them, therefore these stocks are normally picked for investors with a moderate risk profile."

Equity diversified funds are a viable option as the risk is neutralised considerably. Opportunity funds are also recommended by investment managers for risk-neutral investors.

The treatment of a portfolio of a moderate investor differs from that of a risk-averse investor. Vajpeyi says, "The portfolio of a moderate investor is actively managed. The important thing is to know when to get in and when to get out". Which is why management of funds in this category becomes crucial.

Generally stocks are traded on a short-term basis in this category. For someone who wants to trade directly on the bourses and does not have a particular affinity towards risk nor a dislike for it, it is necessary that a close watch is kept on the market trends.

Aggressive investors should ideally opt for a portfolio which is predominated by equity funds. About 70 per cent to 80 per cent of the portfolio should be invested in equities, with other fixed income assets contributing only about a quarter of the portfolio.

Stocks chosen in this category are mainly from information technology, software and biotechnology.

Both cyclical and growth stocks have a favourable return on equity and are relatively immune to economic trends.

But within these sectors too, stock should be carefully on the basis of their performance in the last few years since the returns on equity are fully realised in the long term.

The composition of stocks in this category will differ from those chosen for the moderate investor category and they are handled in a more aggressive manner.

For those investors who are quite confident that the bull is here to stay, sectoral funds is also an option, although fund managers do not advise it.

The amount of cash inflow into these schemes can be monitored according to the financial capabilities of the investor and market trends. It is not necessary that a consolidated bulk payment be made at the time of purchase of the scheme.

A pre-decided amount can be invested on a monthly basis. In a situation when the market is looking down, the stipulated amount for some months can be pooled in and invested for maximum gains.

This alternative is not only most practicable for those who have a salaried income but also prescribed by fund managers.

On an average, investment in equity is more gainful than most other assets as it strikes a balance between risk and return, if planned carefully. Identification of investment objectives, risk profiles and more importantly a great deal of patience are the prerequisites of reaping the benefits of such investments.

And if you don't feel confident about your relationship with lady luck, but don't want to resist the temptation, equity funds might just be your cup of tea.