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:
- 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.
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.
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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