SEBI has directed all the Fund houses(AMCs) to recategorise all their schemes into 36 categories from 30th June 2018 ; Equity(10),Debt (16),Hybrid(6),Solutions(2) and others(2). As a consequence, the names and strategies of many schemes have undergone changes. It is quite challenging for the investor to assess and select the schemes based on historical returns and ratings. Retail investors who have invested earlier based on historical parameters will, all of a sudden, find that some good schemes selected by them are no more doing well. It will be advisable to seek the help of a professional and preferably, a SEBI investment adviser for this and undertake a review and rebalance the portfolio.
Basics in Investing
1. Asset allocation
The return on investment of each of the asset classes (Real Estate, Equity and Debt) may not move in the same direction and hence it is advisable to remain diversified. If you face negative return in one asset class, it may get compensated by positive return in another asset class. The greatest investor Warren Buffet says: “Do not put all your eggs in one basket”
1.1 Real Estate: Real estate investment is indivisible and illiquid. It carries liquidity risk. It may take longer time to find a buyer for selling the property and hence one must invest in real estate only if one wants to remain invested for longer period. Further real estate prices especially in the resident segment are correcting and may not provide the high returns it has generated in the past.
1.2 Equity (Shares and Mutual Funds): It carries volatility risk due to fluctuations of prices in share market. But the volatility gets normalized over a longer period. Hence it is advisable to invest in equity for longer period.
1.3 Debt: Debt exposures can be taken through mutual funds (Debt schemes), corporate bonds or Bank deposits. Corporate bonds offer higher return due to credit risk. Bank deposits are risk-free but the returns after tax may be lower than inflation. It carries inflation risk. Liquid Mutual Funds are better than Bank deposits. It is advisable to invest in Debt Mutual Funds for short term goals.
2. Risk Appetite
The willingness of each individual to take risk varies. All most everyone wants to gain in the market but many have aversion for loss. The market is uncertain and one can aim to gain only when one is willing to take risk. Further there is another dimension to risk .i.e. ability to take risk. Someone starting his career and without dependents can take higher risk but one who has retired and have limited corpus cannot take risk since in the event of market going down, the hard earned money will be lost.
3. Equity allocation
The Certified Financial Planners take the considered view on risk taking by judging whether there is a need to take risk. Further the equity allocation will depend on risk appetite and goal horizon . The general rule “100 minus your age” is your equity allocation.
Once Financial Planners arrive at Equity: Debt, the next step is category allocation. The preferred categories are;
Large Caps: With new categorisation, the large cap funds should invest 80% in the top 100 stocks and hence their capacity in generating higher alpha has decreased. However, the core portfolio should have one large cap fund.
Large & Mid Caps: These funds should have 35% in large cap and 35% in mid cap. The Fund manager(s) has more choices than large cap. This can be a part of the core portfolio.
Mid and Small Caps: Many funds from these categories have recorded negative growth recently due to correction in the prices of these stocks. The price earnings ratios of small cap stocks have exceeded 100. These stocks should be part of the satellite portfolio.
Multi Caps: The fund managers have a wide choice in picking stocks. These Funds are the preferred category now. It should be part of the core portfolio.
ELSS: These funds are preferred tax savings funds and are better than PPF in generating the higher return.
Debt schemes have two risks; i.e Interest rate risk and Credit Risk.
Long Duration Funds: In a rising interest rate scenario it is better to avoid high duration funds i.e. Long Duration, Medium Duration, Guilt Funds and Dynamic Bond Funds.
Low Duration Funds: Liquid Funds, Ultra Short Term Funds, Low duration funds and Money Market Funds are the preferred categories now.
Credit Risk: If one is interested to take credit risk for getting the higher return, one may go for Credit risk fund or Corporate Bond Fund or Banking & PSU fund.
These are combinations of equity and Debt in varying ratios.
Aggressive Hybrid Funds: These are variants of the earlier Balanced Funds and have 65% or more in equity. The tax treatment is like equity funds.
Conservative Hybrid Funds: These are variants of the earlier MIP funds.
Balance Advantage Funds: These funds have a different proportion of equity and debt factoring the market situation.
The preferred Sectoral funds currently are International Funds, Technology, Banking, and Consumption
If you want to walk 5 km in the morning, go by foot or cycle; if you want to travel 100kms, use car or bus; If you want to travel 500 kms, use a train, if you want to travel 1000km; use an aeroplane. Similarly, for an emergency, use liquid mutual fund; for one year, use debt, for the 3-5 year, use balanced fund and for more than 5 years use diversified equity fund. Finally, if you can not do it yourself, take the help of a Certified Financial Planner or a SEBI Registered Investment Adviser and go for investing through Direct Mutual Funds which are cheaper than regular plans sold by distributors and Banks.