A well-known fact about equity investments is that it doesn't rob you of your returns in the long run. In fact, equity has always been kind to those who have showed patience and the perseverance to be invested during tough times. While such a strategy is gainful in the long run, it also needs a careful selection of funds. Diversification of risk among different schemes is an unwritten rule for a perfect investment strategy. In addition, one has to follow a few tips for building a good equity portfolio.
Diversify according to risk appetite
While diversification is a prerequisite, divide your portfolio according to your risk appetite and investment horizon for the portfolio. For instance, splitting the corpus among five diversified funds will be meaningless as all funds will have similar investment strategies. Hence, diversification has to be according to your needs. One of the smarter options could be to divide the portfolio into short-term and long-term, and then choose funds according to the tenure. While higher allocation is recommended towards debt for the short-term fund needs, equity can be for the long-term corpus.
Regular review
Within a long-term portfolio, the choice of equity options needs to be monitored more regularly, as the prospects of equity is associated with the prevailing economic environment. While equity can be expected to generate 12-15 percent returns over the long term, they can vary during the intermittent periods and hence need a close watch. In the case of stocks, the monitoring will have to be more regular as not many companies have the potential to run a cycle of 10-15 years without hiccups.
In the case of mutual funds, the monitoring may be less demanding though funds too have been going through cycles with respect to their performance. Investors can be more relaxed when they opt for diversified funds as the basket of stocks is much wider in the case of these funds. Also, your portfolio is less prone to sectoral risks, which is the case with a sector fund.
Hence, a long-term investment allocation can focus on diversified funds with good track records. Choose your funds carefully, and rely on their past performance and investment strategies. The allocation in favour of diversified funds could be towards large and mid-cap.
Combination of themes
For mutual fund investors, the advantage of investing in a fund is that they have a wider range of products to choose from as mutual funds have a wide basket of schemes. Besides dividing the portfolio between long-term and short-term, build the portfolio across themes. For instance, a larger portion can be towards large-cap funds in the current environment. This share can be as high 60-75 percent. The balance can be in favour of balanced funds, gold, debt and income funds. However, income funds need to be for a period of 1-2 years as their performance is directly dependent on the interest rate environment. Since interest rates go through cyclical performance pressures once in 5-7 years, they should not be considered for long term wealth creation. In fact they should be looked at only during interest rate peak seasons as has been the case at present. Also, they should be avoided when the rates are in an up trend.
In the case of stocks, the portfolio creation should be a combination of growth and cash flow. The latter is met by dividend stocks which have a good track record. Typically, these companies should have a history of good dividend record over a period of 2-3 decades and should be priced well. A high dividend-paying company with a huge market price may not be of any help as they will not allow you acquisition in large numbers.
Diversify according to risk appetite
While diversification is a prerequisite, divide your portfolio according to your risk appetite and investment horizon for the portfolio. For instance, splitting the corpus among five diversified funds will be meaningless as all funds will have similar investment strategies. Hence, diversification has to be according to your needs. One of the smarter options could be to divide the portfolio into short-term and long-term, and then choose funds according to the tenure. While higher allocation is recommended towards debt for the short-term fund needs, equity can be for the long-term corpus.
Regular review
Within a long-term portfolio, the choice of equity options needs to be monitored more regularly, as the prospects of equity is associated with the prevailing economic environment. While equity can be expected to generate 12-15 percent returns over the long term, they can vary during the intermittent periods and hence need a close watch. In the case of stocks, the monitoring will have to be more regular as not many companies have the potential to run a cycle of 10-15 years without hiccups.
In the case of mutual funds, the monitoring may be less demanding though funds too have been going through cycles with respect to their performance. Investors can be more relaxed when they opt for diversified funds as the basket of stocks is much wider in the case of these funds. Also, your portfolio is less prone to sectoral risks, which is the case with a sector fund.
Hence, a long-term investment allocation can focus on diversified funds with good track records. Choose your funds carefully, and rely on their past performance and investment strategies. The allocation in favour of diversified funds could be towards large and mid-cap.
Combination of themes
For mutual fund investors, the advantage of investing in a fund is that they have a wider range of products to choose from as mutual funds have a wide basket of schemes. Besides dividing the portfolio between long-term and short-term, build the portfolio across themes. For instance, a larger portion can be towards large-cap funds in the current environment. This share can be as high 60-75 percent. The balance can be in favour of balanced funds, gold, debt and income funds. However, income funds need to be for a period of 1-2 years as their performance is directly dependent on the interest rate environment. Since interest rates go through cyclical performance pressures once in 5-7 years, they should not be considered for long term wealth creation. In fact they should be looked at only during interest rate peak seasons as has been the case at present. Also, they should be avoided when the rates are in an up trend.
In the case of stocks, the portfolio creation should be a combination of growth and cash flow. The latter is met by dividend stocks which have a good track record. Typically, these companies should have a history of good dividend record over a period of 2-3 decades and should be priced well. A high dividend-paying company with a huge market price may not be of any help as they will not allow you acquisition in large numbers.
