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2014 – 5 New Year’s resolutions for mutual fund investors

December 27, 2013 . Vidya Bala

resolution2Tell me; of the many new-year resolutions that most of us have in mind, shedding those extra kilos would surely be one of them? At least for a good number of us?   I know, that’s easier said than done.

But if you can shed some baggage without any physical effort by simply reinforcing some beliefs, doesn’t that sound cool to you? But I am not talking of those extra pounds; I am talking of the excess baggage that most investors tend to carry with regard to their investments.

Try shedding some of this baggage, without much effort, and you will have a super-fit investment portfolio!

So here are 5 resolutions that I can think of, for any mutual fund investor:

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  1. Spend less time timing the market and more time staying in the market

Simply put, stay invested  over your intended time frame. This is true of equity and debt funds.

Most of you may be investing in mutual funds because of the convenience of investing in equity and debt markets without having to track your investments or time the markets right or pick the right stocks; and yet manage inflation-beating returns.

If that be the objective, then there could be little need to try and time the market by waiting for a dip (or a bigger dip) to invest, or worse still, continuously starting and stopping SIPs based on market movements. You may do more harm to your portfolio than good, often times.

For instance, assume you had an SIP running from January 2013 and the market volatility panicked you into stopping your SIPs by June and you just held the money invested thus far.

In a mid-cap fund like HDFC Mid-Cap Opportunities you would have got an IRR of 17% but had you continued the SIPs till the end of the year, your SIP returns would have been a good 30%. Even in a large-cap fund such as ICICI Pru Focused Bluechip your returns would have been 19% if you ran your SIPs than the 14% IRR had you stopped it mid-year and held on.

If you are a very long-term investor (10 year or more) then no harm in investing a lump sum and hoping you can build your wealth. But if you wish to time the market every time, you need to have deep pockets and acumen to spot market movements. For those with limited sums, SIPs remain the best bet.

2.       Don’t chase returns, chase consistency instead

I know the toppers’ chart for the year can really tempt you into switching your existing holdings to the chart toppers of the year. But remember, the toppers seldom find a place in the next year’s chart busters. Do read our article on choosing funds based on 1-year performance: Should you invest based on 1-year performance?

By unnecessarily switching funds, you may not only make your portfolio volatile and incur loads/taxes but lose out on the SIP and compounding benefits in the existing steady funds that you may hold.

3.       Don’t obsess over marginal rating changes

If you have been following one of the few mutual fund ratings available for domestic funds, you might at least every quarter be faced with a  dilemma on whether you should be exiting some of your funds that moved from a say 5-rating to 4 or from a 4-rating to 3.

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Yes, ratings are a good tool for you to keep track of the performance of funds but remember no fund can have relentless top notch performance. Only several quarters of sustained under performance should give you the warning signal.

There will be slip ups that may result in some of the rating agencies lowering the ratings. While you may have to keep watch of the performance of such funds, do not let all the noise, especially a media update on top quarterly performers, tempt you into disturbing your portfolio.

You can though, check with your advisor on whether you need to be worried about the performance of any specific fund as a result of the rating change.

Also different rating firms have different criteria to provide/change ratings. Follow one of them and not be confused by the difference across the rating houses.

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4.     Invest with a goal/ time frame

Most often, your investment decisions seem wrong at a later date because you did not have a goal/time frame for your investment.  How does this affect your portfolio?

If you did not have any time frame and  started investing in say an equity fund and see the fund returns fall in 1 year, you believe you were given a wrong fund or believe that mutual funds result in losing capital.

But if your investment purpose was for 5 years and you have been advised to keep the investment going for that period to generate wealth, then the 1-year dip should not bother you as long-term performance tends to even out any short-term falls.

Lack of a clear idea on when you need your money back forces you into changing your investment decisions every time you see a market movement.

This is true of debt funds as well. If you bought an income fund this year and saw the performance dip after July, the first question in your mind would be whether to exit it. But income funds are meant to be held for at least a 3-year period and it was only the interest rate hike that caused funds across this category to fall. Your time frame cannot change just because the market goes through a few kinks.

If you do invest without a goal or time frame, know what is the minimum time frame over which a particular fund/category is required to be held for it to deliver optimal returns and hold on to that time frame. Chances are that you will end with decent returns (sector funds are certainly exceptions to this rule).

5.       Review schemes and asset allocation

While we keep talking of not disturbing your portfolio, there would certainly be times when you need to review or rebalance your portfolio. And what better time than a year end to examine your portfolio health?

Short-term blips both in equity and debt market are not reasons for you to be worried. But if a fund has steadily under performed its benchmark by a t least 5 percentage points over 4-8 quarters, then the first thing would be for you to check with your advisor whether you need to stop your SIP on the fund.

Review of your asset allocation is also an important project. In sharp bull markets your equity portfolio may have  become inflated; conversely in a down market, your equity allocation may be much lower than your original equity allocation, as a result of any sharp fall.

Rebalancing will not just help you bring back your asset allocation; it directly helps you to buy more of an asset class that has fallen and is therefore cheap; and also book profits in asset classes that have become expensive.

If the above is too much time for you to follow, take a look at our Smart Solutions, an automated advisory service that will remind and help you to do both at the click of a button!

Just try following these rules with some discipline and you will see your portfolio bloom.

If you actually read through this long article patiently, thanks. I hope I can spare you of such long articles in future; for my resolution for 2014 is to convey as much, in as little words as possible. Have a fabulous year ahead!

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19 thoughts on “2014 – 5 New Year’s resolutions for mutual fund investors

  1. MY MUTUAL FUND INVESTMENT (SIP) HAS GIVEN 16% RETURN FOR THE LAST 2 YEARS. CAN I SAFELY TRANSFER IN TO LIQUID FUND or DEBT FUND? AND CONTINUE THE SIP

    1. hello Sir,

      You should be booking profits if –
      1. your original equity allocation (if you did have an asset allocation Plan) is more than 5-10 percentage points off the original allocation. For instance, you had a 60% allocation and it went to 70%. But I suppose, you are mostly holding equity funds, so you do not have an asset allocation plan in place.
      2. You are nearing your goal and wish to move money slowly to safer instruments.
      3. You have a mediocre performing fund and wish to sell when the returns are decent.

      If none of the above is true then you need not disturbing the compounding effect in a superior asset class like equity by booking profits at this stage. When you have extraordinary rallies like over 100% (in years like 2007), then that may be reason to book profits.
      thanks.

  2. Hi Vidya
    Nice article. I have one question regarding the MF portfolio. My goal is to create wealth in the long term (15 to 25 yrs) for my own retirement and childrens education and marriage. Am a regular investor in MF via SIP since 2005 in the funds you have recommeded in your portal and have some 4 star and 5 star funds like DSPBR top 100, FT India Bluechip, IDFC Premier, Quantum LTE etc.

    I do have L&T equity fund(Fidelity equity fund) since its inception from 2005 and have accumulated more units in this fund. This fund was once the top performer in the category may be a couple of years back. If I disturb this fund and switch to other better performing fund I will lose the power of compounding generated in this fund since from inception. How do you suggest about L&T fund. I think other funds are good funds which fundsindia has recommeded.

    Since my horizon is for long term, I think I should not bother on the volatility existing in the markets now. Please comment

    1. hello Satish, If you are an activated account holder,request you to route your query through ‘Ask Advisor’ feature in your account, under help tab. thanks.

  3. One thing which I do not agree that invest with goal/time frame.As no one knowshow the stock market will behave in near future.If the time frame would have been three years,I do not think if any one would have got better return than bank’s cumulative fixed deposit.Now mutual fund industry wish that the investor’s nshould have time frame of more than five years.God knows if any one will achieve the goal after 5 years with returns more than fixed deposit.

    1. Hello Satish, it is all about asset allocation, when it comes to inveting based on time frame. if you had the right allocation of equity and debt (and gold for those who favour it) then it is possible to curtail such volatility. Yes, equities are for the long term and if any one who tells you otherwise, you would have to suspect it.
      Also, do check in how many 3-year periods that FD would have performed equities. Very rare. Hence to write off equities based on the point-to point 3-year returns may amount to missing out tremendous opportunities. can you imagine 20% CAGR in FD over 5 years? That amounts to 2.5 times your capital. Hence, if you wish to be invested in equities, yes, it is only for your long term goals. As for FD, one has to compare it with similar product in MFs – which is debt fund. Do not forget that a good number of debt funds have delivered superior post-tax returns compared with FD over a 3-year period. We are certainly not saying that you shun FD. Put your eggs across fixed yielding options like FD and and market-linked instruments like mutual funds to earn optimal returns.thanks, Vidya

  4. Hi,

    Good Read!

    Though I am often confused between so many funds to choose from, for example until last year HDFC top 200 was a 5 star rated fund, now many channels and newspapers, etc are not even considering this one and more often the rating is seen to be 3 stars. So what should one do in such a situation, because as an individual I may not have time to review funds from time to time and just might be willing to follow what pundits are advising, should I be switching funds from lower rating to higher ones in case former has been consistently in lower ratings.

    Regards
    Deb

    1. hello Satish, HDFC Top 200 did see a dip because of underperformance of certain funds. it has bounced back hence. Do not let rating change in 2-3 qtrs, push you into switching funds, esp. if you are invested in established funds. In general, look for any under performance over benchmark for sustained periods. thanks.

  5. Hi Vidya,
    I am having 4 mutual funds in my portfolio.
    1. Hdfc top 200
    2. Dsp black top100
    3. Idfc premier equity.
    4, HDFC tax saver.

    I wanted to increase my sip in IDFC premier equity, But my client (kotak sucrities) said, you can’t increase your SIP. You have to cancel the existing SIPs and restart with new SIP. I don’t want stop my existing SIPs, instead , I am planning to add new fund in my portfolio. Can you suggest any good mid-small MF?

    How is my portfolio? Any modification needed?

    Thanks,
    Ashish

    1. hello Ashish, One simple reason why you should have a FundsIndia account – do flexible SIPs, step-up SIPs gradually, all this at click, without having to stop existing SIp or start afresh 🙂 There are a host of value add features and advisory services online that you will not find with regular brokers. Fund suggestions to all our active account holders are made through the free’Ask Advisor’ feature in their account. Pl. use the feature if you have activated your account to receive advice. thanks.

  6. DEAR MISS VIDYA,

    I HAVE PLAN TO INVEST 25 K PER MONTH FOR 3 YEARS IN A LOW RISK FUND CAN YOU SUGGEST ME WHICH FUND IS BETTER FOR ME AND I CAN GET ATLEAST 12% RETURN WITH LOW RISK.

    1. hello Khursheed, if your requirement is low risk, go for short-term debt funds/income funds. But the 12% return you are asking for cannot come with ‘low risk’ and is possible only with equity, at least balanced funds. Since you have an activated account with us, pl. use the help tab and choose advisor appointment, to allow our advisor to help you – you can either mail your query and ask for a response or fix a scheduled call. That is the formal way for fund suggestion and review for our investors in the platform.The blog is more of a discussion centre. Alternatively, I can ask one of our advisors to call you, if you give your consent here. thanks, Vidya

  7. Hi,

    I currently hold the below SIPs. My time frame is 10-15 years.
    HDFC EQUITY growth – 2000 pm
    IDFC Premier Equity growth- 2000 pm
    ICICI Focussed Bluechip Growth – 2000 pm

    need your valuable advise on
    1. Should I retain HDFC Equity ? or please suggest a fund to diversify my portfolio.
    2. Currently I am investing 6k pm in MF. I want to increase it to10k pm. Should I opt for any more fund or increase my inveastment in current funds?

    1. Hi Sudha,

      to answer portfolio specific queries, it will help if you use your FundsIndia account to raise a formal ticket using ‘Advisor appointment’. Our advisors will help you. It is free.
      Pl. complete your free registration (if you have not) and have your account activated to enable us to help you. You can also use easy transfers to move your investment and keep all your funds in a single platform. thanks, Vidya

  8. I am a pensioner with my pension income exceeding 6,00,000 per annum. All I want to do is to keep my income tax within 10% slab. I want to make tax-free investments, if the returns are just about a bank’s interest rate. Please advice.

    1. Hello Sir, tax-free income is a tough proposition unless you invest in tax-free bonds. Currently, there is no fresh issue of tax-free bonds. You can consider a combination of post office senior citizens scheme (you will get 80C benefit for it), and corporate deposits. Debt mutual funds are an option but you will incur short-term capital gains for any withdrawal or sale before 3 years. thanks, Vidya

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