In a volatile stock market, choosing a potential scheme is more challenging. Investors need to look beyond short-term returns
There has been plenty of talk about the falling returns from mutual funds with most funds posting negative returns for one year duration. In the case of systematic investment plans (SIP), the picture is no different, though investor gets to invest over different market periods. However, the negative returns from SIPs can't be blamed as they generally tend to offer handsome returns over the long run.
On the other hand, in a booming market environment, even SIPs tend to give excellent returns. Needless to say, many investors were used to such whopping profits from SIPs even over the short term, and hence, the current market environment has been a cause for worry.
In the present market scenario, choosing the right mutual fund has become more challenging as no scheme has managed to hold on to its leadership status beyond a few weeks. So, the time has come for investors to have a good combination of funds and schemes, which ensures stability for their portfolio as that is the only way to minimise losses or reduce rapid erosion from portfolio in the short term. 'Short term', because, mutual funds tend to outperform direct equity investments over the long term, but, during the short term, are prone to higher erosion. Unfortunately for many investors, mutual funds are expected to outperform stocks or the index even during the short term and hence jittery over their negative returns.
The fundamental principle of mutual fund investments should be a long horizon as history has shown that over a period of 7-10 years, funds have managed to post a better show. So an investor, at the time of investing, needs to be clear about his investment goals and opt for a portfolio according to his risk appetite.
SIP and long-term strategy for better returns
Though mutual funds themselves are diversified products, it is not a bad idea to for go for a combination of schemes.
Those who hate volatility and prefer sustained performance over the long term can allocate a larger percentage of the corpus to diversified funds. This can be as high as 80 percent in the current market scenario. The balance could be towards a combination of schemes like sectoral funds, fixed maturity plans and gold funds.
In the case of diversified funds, one needs to go in for a careful choice and stick to funds which have a long track record of performance. This fund or scheme may not figure among the top performers but you need to look at its investment principles and strategies rather than merely chasing returns. Though we have only a few funds with over seven years' performance track record, check out the performance of your fund over the last six months on a monthly basis. This will throw light on the fund's ability to manage volatility.
The good news for investors is that at present, the basket of diversified funds is big and even sectoral funds have an investment mandate for more than 2-3 funds. This can act as an additional advantage for those who want moderate risk from diversified funds. Besides diversified funds, allocate a small percentage of your corpus to sectoral funds such as infrastructure, entertainment and gold. Not only will this give the much-needed diversity to the portfolio but will help in improving the returns from the portfolio during market recovery.
Besides diversified funds, products such as fixed maturity plans can be used to protect the corpus as a debt option. In the last few months, gold and real estate have turned to be other options for low risk investors. While gold has been on an uptrend like equity in a short span of time, the returns tend to average out over the long term unlike equity. Hence, allocation to gold needs to be reviewed at regular intervals and a passive investment strategy may not help.
There has been plenty of talk about the falling returns from mutual funds with most funds posting negative returns for one year duration. In the case of systematic investment plans (SIP), the picture is no different, though investor gets to invest over different market periods. However, the negative returns from SIPs can't be blamed as they generally tend to offer handsome returns over the long run.
On the other hand, in a booming market environment, even SIPs tend to give excellent returns. Needless to say, many investors were used to such whopping profits from SIPs even over the short term, and hence, the current market environment has been a cause for worry.
In the present market scenario, choosing the right mutual fund has become more challenging as no scheme has managed to hold on to its leadership status beyond a few weeks. So, the time has come for investors to have a good combination of funds and schemes, which ensures stability for their portfolio as that is the only way to minimise losses or reduce rapid erosion from portfolio in the short term. 'Short term', because, mutual funds tend to outperform direct equity investments over the long term, but, during the short term, are prone to higher erosion. Unfortunately for many investors, mutual funds are expected to outperform stocks or the index even during the short term and hence jittery over their negative returns.
The fundamental principle of mutual fund investments should be a long horizon as history has shown that over a period of 7-10 years, funds have managed to post a better show. So an investor, at the time of investing, needs to be clear about his investment goals and opt for a portfolio according to his risk appetite.
SIP and long-term strategy for better returns
Though mutual funds themselves are diversified products, it is not a bad idea to for go for a combination of schemes.
Those who hate volatility and prefer sustained performance over the long term can allocate a larger percentage of the corpus to diversified funds. This can be as high as 80 percent in the current market scenario. The balance could be towards a combination of schemes like sectoral funds, fixed maturity plans and gold funds.
In the case of diversified funds, one needs to go in for a careful choice and stick to funds which have a long track record of performance. This fund or scheme may not figure among the top performers but you need to look at its investment principles and strategies rather than merely chasing returns. Though we have only a few funds with over seven years' performance track record, check out the performance of your fund over the last six months on a monthly basis. This will throw light on the fund's ability to manage volatility.
The good news for investors is that at present, the basket of diversified funds is big and even sectoral funds have an investment mandate for more than 2-3 funds. This can act as an additional advantage for those who want moderate risk from diversified funds. Besides diversified funds, allocate a small percentage of your corpus to sectoral funds such as infrastructure, entertainment and gold. Not only will this give the much-needed diversity to the portfolio but will help in improving the returns from the portfolio during market recovery.
Besides diversified funds, products such as fixed maturity plans can be used to protect the corpus as a debt option. In the last few months, gold and real estate have turned to be other options for low risk investors. While gold has been on an uptrend like equity in a short span of time, the returns tend to average out over the long term unlike equity. Hence, allocation to gold needs to be reviewed at regular intervals and a passive investment strategy may not help.
