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Profit booking and asset allocation crucial for Mutual Fund investor

 

 

Some strategies to help you get the most out of your mutual fund portfolio


   One of the biggest challenges for equity investors in recent times has been the choice of stock or mutual fund scheme for their portfolio. While stock selection is more dependent on its sector, quality of management and its future prospects, mutual fund selection is dependent on a different set of parameters. Here, the consistency of the fund, its ability to deliver against benchmark indices and even its ability to manage market shocks are the relevant parameters. While mutual fund investors have a lot more help for the selection, the task gets easier if the investor is clear about his need and risk appetite.


   The first step towards creating a mutual fund portfolio is the identification of tenure for the corpus. The golden principle is that shorter the tenure, lower would be the allocation to equity and on the contrary, an investor who has time on his hands, can dabble in other options like balanced fund etc. The next prerequisite would the asset allocation as it ensures better risk management. Besides these two factors, investors will also have to keep a number of factors in mind, before creating a mutual fund portfolio.


   Here are some tips that can help in the exercise:

Check fund's philosophy    

If the quality of management of a company's philosophy is a crucial factor for investing in stocks, so is the case with a mutual fund. While the prospects of returns can be the deciding factor in the early stages of investing, an investor will have to move beyond this as he gains experience.


   For instance, it is important to invest in a fund which invests in its processes and is less dependent on the individual brilliance of the fund manager. For individual investors, it would be impossible to keep pace with the changes in the fund manager's profile over the long term. After all, a mutual fund is a preferred option because it ensures professional management with a basket of stocks. Hence, a fund manager's individual preference should not be the guiding factor for investments.

Don't go only by past performance    

While past performance needs to be looked into, one need not base the entire fund choice based on past record. As the mutual fund document itself points out, past performance may not be sustained forever. In fact, one should also look at the change in fund management style over the years while choosing a fund.


   More importantly, the sector assumes significance particularly for sectoral funds as one can't go purely by past performance.

Evaluate regularly    

Investing is all about being at the right place at the right time. Not only does it mean getting the timing right at the time of entry but also with respect to exits. In fact, exiting an investment is a tougher challenge than an entry as everyone hates the idea of losing profits.


   The profit booking need not be at one go but instead, make it a habit to book profits at regular intervals. Profit booking is a necessity when funds are needed to meet milestone needs. In some cases, it would not be an aberration to state that profit booking should be determined by individual needs rather than market levels.

Asset allocation    

A smart investment strategy is all about asset allocation and mutual funds need not be synonymous with equity. Mutual funds too have various options within the debt category. The allocation should be driven by the risk and balancing needs of the portfolio.

Staggered approach    

Unlike direct stocks, it is much easier to follow a staggered approach while investing in mutual funds. The mutual fund industry has products like the systematic investment plan (SIP) and systematic transfer plan (STP) which allow an investor to stagger the investments resulting in better use of volatility.

 


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