Skip to main content

Constituents of an Investment Portfolio

Invest In Tax Saving Mutual Funds Online

Call 0 94 8300 8300 (India)

One should be able to choose the right fund within an asset class to create the most rewarding portfolio

 

After asset allocation at broad level of debt-vs-equity, the second level of asset allocation that a portfolio must do is within these asset classes. There are a wide variety of funds available within both debt and equity.

The world of debt funds is an orderly one and the funds are rather neatly arranged in terms of the time horizon of the securities they invest in. While studying the impact of these is a science by itself all that an investor needs to do is to match the time horizon of the fund to his own. Thus very short-term money must go into ultra-short term funds, short-term into short-term and so on. The longer the period, the more volatile funds tend to be when interest rates change. This makes it dangerous to invest in longer-term funds for short periods of time.

 

Core Funds


While diversification within debt funds is a straightforward issue, equity funds are a different kettle of fish. The general approach that should be followed is to devote a large part of the portfolio to what can be called 'core' funds and the rest to supporting funds.

 

The next thing to understand is what are core equity funds and how much you should invest in them. The idea behind a core fund is that it should be a fund that is able to deliver returns in good times without being too volatile. While almost any fund can deliver returns when the markets are rising (as is obvious nowadays), it takes a special skill to keep a fund relatively stable during volatile or bad times. The Value Research star rating system is based on a methodology that captures the returns that a fund generates relative to the risk it takes. On ValueResearchOnline.com, you can peak behind the scenes and see how different combinations of risk and return can earn different funds the same rating.

 

For example, the June 2013 list of large cap equity funds has six funds that have a five star rating. Of these, Franklin India Bluechip has below average risk grade and above average returns grade. In contrast, IDFC Nifty has an average risk grade and high returns grade. Thus, compared to Franklin India Bluechip, IDFC Nifty delivers higher returns but takes more risk in doing so.

 

This is the kind of insight that should be the key driver in deciding which funds should form the core of your portfolio. In general, the core should be composed of funds that offer stability coupled with returns. It is dangerous to judge funds purely by short-term returns. Long-term risk-adjusted performance through a wide variety of market conditions should be the key parameter for selecting core funds.

 

Supporting Funds


Beyond the core lie the supporting funds, whose main functions is to fill up gaps that our core funds may leave and to add a chance of getting extra returns at the cost of extra risk. Of course, there may actually be no need for any non-core funds at all. If you are a conservative investor then you should, by all means, make core funds 100 per cent of your equity holdings and not bother about anything riskier. However, judiciously choosing some non-core funds can help. For example, your core funds could well be all large-cap funds. Adding 10 or 20 per cent in funds that focus on mid-caps could enhance your returns during the times when mid-caps are outperforming large-caps. Since mid-caps are also likely to be more volatile than large-caps, the exposure should be limited.

 

On the same principle, you could also use sector funds as non-core holdings. However, this needs to be done with a great deal of care. You could read the ad of a sector fund and buy into the argument that you need to invest in that sector but if the sector is worth investing in, the chances are that the managers of your other funds have already invested in it. If you analyse your portfolio using the online tools in the portfolio manager at

 

If you decide to invest in a particular sector then you are actually saying that there is something wrong in the sectoral break-up that the fund managers of your existing funds have chosen and you need to correct that. Clearly, you should think of sectoral funds if you are really sure you know what they are doing.

 

How many funds?


How many funds should your portfolio have? After all, it is entirely possible to invest in just one balanced fund and be done with your portfolio. While this ultra-simple approach has its good points, in practice you should diversify a little bit because any individual fund manager can make mistakes. Diversification helps guard against such mistakes. In our opinion, two to four equity funds and one or two debt funds are quite enough for each type of fund that you need. So if you want a portfolio that needs short-term debt funds, floating rate debt funds, large-cap diversified equity funds and mid-cap funds, then one fund each in the two debt categories, three large-cap funds and three mid-cap funds are quite enough. Beyond this you are just going to add complexity of management without buying any additional stability.

 

Of course, looking at the actual portfolios that people send us, most investors tend to err on the side of having too many funds rather than too few. Portfolios of around 20 funds are actually quite common and 50 or more are not unheard off. To make matters worse, many of these portfolios actually have very little diversification because investors tend to buy many funds of same type that they like. One portfolio that we came across recently was a collection of practically every mid-cap fund in the country. This is not diversification by any stretch of the imagination.

 

Evolving a Portfolio


The last and possibly the most important part of building a great portfolio is that it must be monitored and must evolve to suit changing conditions. One major imperative for change could be that a formerly good fund could start consistently underperforming. This shouldn't but can happen even with a well-chosen fund. Of course you must not jump the gun and fire a fund for short problematic periods but if a fund is doing considerably worse than others of the same type for more than a year, you should think of switching to another one.

 

The other reason for changing a portfolio is that the time when you will need the money is getting nearer. A portfolio that started out as a five-year, medium-term investment will be a short-term portfolio four years later. The solution is clear--portfolios must be reworked as the time to liquidate them gets nearer. Otherwise, your hard-earned equity returns could get wiped out in a bear market just as you need the money. As the time comes nearer, you must start moving the money into debt funds gradually, perhaps a year or two beforehand. This is crucial in protecting you returns.

 

Think


The overall message of what we are saying is really that while portfolio construction is not rocket science, it requires a great deal of careful thought and systematic actions. Besides great returns and just the right amount of risk, the most important payoff of building a portfolio methodically will be peace of mind. You'll know what you are doing and why you are doing it and you'll sleep peacefully at night for having done it.

Happy Investing!!

We can help. Call 0 94 8300 8300 (India)

Leave your comment with mail ID and we will answer them

OR

You can write back to us at PrajnaCapital [at] Gmail [dot] Com

---------------------------------------------

Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.

Invest Tax Saving Mutual Funds Online

Tax Saving Mutual Funds Online

These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)

Download Tax Saving Mutual Fund Application Forms from all AMCs

Download Tax Saving Mutual Fund Applications

These Application Forms can be used for buying regular mutual funds also

Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )

  1. ICICI Prudential Tax Plan Invest Online
  2. HDFC TaxSaver Invest Online
  3. DSP BlackRock Tax Saver Fund Invest Online
  4. Reliance Tax Saver (ELSS) Fund Invest Online
  5. Birla Sun Life Tax Relief '96 Invest Online
  6. IDFC Tax Advantage (ELSS) Fund Invest Online
  7. SBI Magnum Tax Gain Scheme 1993 Invest Online
  8. Sundaram Tax Saver Invest Online
  9. Edelweiss ELSS Invest Online

------------------

Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Birla Sun Life Front Line Equity Fund
    2. Large and Midcap Funds Invest Online
      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
    1. Mid and SmallCap Funds Invest Online
      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
    1. Small and MicroCap Funds Invest Online
      1. DSP BlackRock MicroCap Fund
    1. Sector Funds Invest Online
      1. Reliance Banking Fund
      2. Reliance Banking Fund
    1. Tax Saver MutualFunds Invest Online
      1. ICICI Prudential Tax Plan
      2. HDFC Taxsaver
      3. DSP BlackRock Tax Saver Fund
      4. Reliance Tax Saver (ELSS) Fund
    2. Gold Mutual Funds Invest Online
      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund

Popular posts from this blog

Understanding Your Cibil Credit Information Report

   WE ARE all familiar with the anxiety and uncertainty that we feel when applying for a loan. After all, it's the lender who decides whether we can own our dream home, our first car, or whether our children can pursue higher education. In a nutshell, a better life depends on the lender's decisions.    While other factors do play a part in the lender's decision, the Cibil Credit Information Report ( CIR ) plays a crucial role in a lender's decision to approve a loan application.    Previously, lenders would treat all loan seekers equally. Each applicant, if approved by the lender's internal credit policy, would be charged at the same interest rate for a particular loan size and purpose. The lenders would charge a higher interest rate to all the borrowers, in order to compensate for the possible default of a small portion of the loan disbursed. In other words, it's like a professor (the lender) punishing an entire class (borrowers) for the mischief played b...
Read more

How much to invest in gold ?

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India) Let your motivation dictate the share of the yellow metal in your portfolio Enough has been said and written about gold as an investment option. The latest argument is that the craze for gold among Indian households is endangering our country's balance of payments. The policymakers are busy trying to find ways of discouraging investment in gold, but if households keep the common good in mind, they would be paying the market price for gas cylinders as they do for, say, their mobile phone bills. After all, private decisions are driven by private motives. So, how should a household look at gold from its own perspective? Gold is primarily acquired for its merit as a store of value. Even if the worst crisis hits a family, the gold that it holds could be put to use anywhere in th...
Read more

Save Tax With Mutual Funds

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300       Mutual funds are ideal as long term investment avenues for retail investors. To encourage investments in this avenue, the Government of India offers investors a spate of tax benefits thus ensuring maximum benefit from mutual funds held beyond a year. Sample some of the key benefits and refer to the table for a detailed list of tax rates for different types of schemes ·        Avail deductions under Sec 80C of the Income Tax Act by investing up to a maximum of Rs. 1 lakh in designated Equity Linked Savings Schemes (ELSS). Such investments have a compulsory lock in period of 3 years. ·        First time retail investors in equity with a gross total income of up to Rs. 12 lakh can invest up to Rs. 50,000 in specific MF schemes un...
Read more

Reliance Health Total

  Reliance Life Insurance has launched Reliance Health Total, a non-linked, non-participating and non-variable health insurance plan . It provides a fixed benefit cover for hospitalisation, critical illnesses and surgeries. The customer can also make a claim for over-the-counter health-related expenses. This is a regular-pay, five-year plan that can be renewed till the age of 99. The plan comes with two options: customers can choose a higher medical reimbursement benefit or a higher sum insured. Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015 1. ICICI Prudential Tax Plan 2. Reliance Tax Saver (ELSS) Fund 3. HDFC TaxSaver 4. DSP BlackRock Tax Saver Fund 5. Religare Tax Plan 6. Franklin India TaxShield 7. Canara Robeco Equity Tax Saver 8. IDFC Tax Advantage (ELSS) Fund 9. Axis Tax Saver Fund 10. BNP Paribas Long Term Equity Fund You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds Invest in Tax Saver Mutual Funds Online - I...
Read more

Compared to Bank FDs, Debt Mutual Funds are more Tax-Efficient

It is a security vis-a-vis returns battle between bank fixed deposits and debt funds In the past few months, banks have been consistently increasing their rates of interest on different fixed deposits. And after the Reserve Bank of India's Annual Monetary Policy, even the saving deposit rates are up at 4 per cent. For a six-month fixed deposit, you can easily get a rate of anywhere between 6 and 7 per cent annually. However, experts feel if one is looking to invest for less than a year, debt funds could make a better choice. The reason: Liquid funds and ultra short-term funds are giving annualised returns of 8 per cent. Financial advisors suggest retail investors opt for mutual fund schemes as they are more flexible and give higher post-tax returns. Opt for fixed deposits only if you are comfortable being locked-in for the tenure as a premature exit can attract a penalty. If your main aim is to ensure liquidity, debt funds are preferable. Though a fixed deposit gives you a...
Read more
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now