MUTUAL FUND

With the closing on a new high, is it a good time to start a systematic investment plan (SIP) or should one wait for a correction?

It is important for investors to realise that investing through an is a commitment to invest a fixed amount in a chosen fund at pre-decided intervals. In other words, brings in discipline in one’s investment approach and allows an investor to benefit from ‘averaging’. Therefore, considering the market level before investing in goes against its basic principle. For example, if one commits to invest in equity funds through SIPs for 10 years, the current market level will hardly have any impact on the end result after the completion of the time horizon. In fact, the key to success would be to stay committed to the time horizon and continue investing, irrespective of market conditions.

There are a lot of times investors see their fund performing badly. How much time should one give a fund manager or a particular scheme to perform before exiting?

Monitoring the performance of funds is an integral part of one’s investment process. In fact, it is as important as choosing the right funds based on one’s time horizon and risk profile.

However, it is important to put performance in proper perspective. Many investors, while analysing performance, make the mistake of considering absolute return, rather than a fund’s relative return, i.e. comparing a fund’s performance vis-a- vis its benchmark and peer group. Hence, they often attribute poor returns to the fund manager’s performance. Therefore, as long as a fund is performing compared to its benchmark and the peer group, there should not be any reason to exit.

Of course, if a fund performs poorly on a relative return basis for a period of one year or so, it might be time to exit. However, before doing so, it would be prudent to go beyond short-term performance track record, as certain investment strategies and philosophies might not work during certain periods but may have the potential to outperform the peer group once the economy recovers, as envisaged by the fund manager.

For an investor starting late, say 40s, is it a good thing to put his entire investment corpus in large-cap funds (for safety), mid-and small-cap funds (for aggression), or multi-cap funds (a bit of both). What is your suggestion?

Before deciding on which type of equity funds to invest in, investors must determine their asset allocation based on their time horizon and risk profile. Once it is ascertained how much money has to be allocated to equity funds, the key would be to have a well balanced portfolio in terms of exposure to different segments of the market. While investors have the option of choosing funds investing exclusively in a particular segment like large, mid and small, not many of them may be able to decide on the right allocation to each of these segments.

Ideally, for someone starting in the 40s, the allocation to large and small/mid-cap should be in the ratio of 60:40, respectively. Hence, the right thing to do would be to opt for multi-cap funds with a bias towards large-cap stocks. Besides, a fund manager of a multi-cap fund has the flexibility to realign the portfolio based on the emerging market scenario, thus enabling the investor to benefit from the opportunities that may emerge from time to time.