Greed and fear eat into our investments. We know we cannot time the market, but often try to. Understanding the basics of financial planning and sticking to your plan is the best way to achieve your goals. ICICI Prudential Mutual Fund, in collaboration with Money Today, has been organising investor conferences, Investor Awareness Initiative-2011, in several cities to popularise sound financial planning. What are the basics of financial planning?
Here are some excerpts from the interactive session during the fourth such conference held in Kolkata in December. The speakers at the conference were Aniruddha Chaudhuri, Zonal Business Manager, East Zone, ICICI Prudential AMC, and Tanvi Varma, Associate Editor, Money Today.
I invested in a mutual fund three years ago. However, the corpus is showing negative returns now. So, why should I invest in mutual funds?
Mutual fund is a powerful investment tool and also the cheapest possible way to invest. To have a good portfolio you have to employ a financial planner or devote some time for planning.
Consider an aggressive investor who wants to invest 70% in equity and 30% in debt. Say the Sensex was at 16,000 then and the market goes down to 14,000 levels. So, of Rs 100 invested, the equity portion of Rs 70 would now have reduced to about Rs 65. This is the time to re-balance a portfolio.
Staying aggressive, 70% of Rs 95 should now be in equity. So, some money has to be pulled out of debt and invested in equity. Most people don't do this. We think more money will sink. On the other hand if the market goes up, one should move some money invested in equity into debt to keep to the 70:30 ratio. However, most would think they're limiting their gains.
Your financial plan will depend on your age, dependents and present financial position. Do not put all your eggs in one basket. Just as putting everything into equity can be detrimental, investing only in liquid funds or for a short period may also not work. You should have a diversified asset portfolio. While product selection is important, the method of selection is just as important to get the best returns.
"Mutual fund is a powerful investment tool and also the cheapest possible way to invest for retail investors"What is the benefit of investing in a capital protection fund? If the same money is invested in a fixed deposit, you get the capital as well as the return.
Again, let us take an investment of Rs 100, but where Rs 70 is invested in debt and the rest in equity. At current interest rates, the Rs 70 would become Rs 100 on maturity of say three years while the rest of the money that is invested in equity gives market-related returns. So, the capital is protected and there is that cushion with the possibility of getting higher returns.
Now, if the interest rates come down, more than Rs 70 will have to be in debt, say Rs 80 or Rs 85 to get Rs 100. On a three-year basis, even if the equity investments give you some returns, you get a bit extra on your investment. These funds are good now as interest rates are high. It is also a good time for equities since the market is low and could give returns over the medium term.How important is a fund's track record while deciding on which fund to invest?
The track record of a fund is just one parameter. There are other things to check as well. See if the fund always sticks to its mandate. Take ICICI Prudential Focused Bluechip Fund. This is a large-cap fund which limits its investments to 20-25 stocks. However, if there is a sustained rally in the mid-cap sector, this fund might not be able to perform as well as mid-cap funds. But that should not lead to an alteration of the fund's structure. In this particular case, the fund will not. If it sticks to its mandate and you are comfortable with the track record, please invest in it even if the fund manager changes.What is the importance of a fund manager?
"Just as putting everything in equity is detrimental, investing only in liquid funds or for a short period will also not work"
It is important to know that it is not just the manager who decides on investment. There is a research analyst and an investment committee involved as well. However, the expertise the manager is important.How often should one re-balance a portfolio?
There is no thumb rule for this. You can check it on a quarterly basis or half-yearly basis. The bottom line is that one should review and re-balance at a regular intervals.Where should one invest considering the current situation?
Please don't change your investment plans according to market conditions. Draw out a long-term plan and work towards the achieving your financial goals.