Structure your MF portfolio well

Although the bellwether BSE Sensex crossed the 20,000 points mark on the back of huge inflows by foreign institutional investors (FIIs), the net domestic financial institutions (DFIs) figures have been negative overall.

One of the prime reasons for this is that domestic mutual funds (MFs) have faced massive redemption pressure.

Whether this is a sign of maturity of the Indian investors who burnt their fingers by not selling their profitable MF investments three years ago or if it will turn out to be a Sensex- level driven panic button pressing action that investors regret subsequently, only time can tell.

On a weekly TV show on MFs we are now inundated with queries for evaluation of complex MF investment strategies. On these shows, just as in my Bschool guest lectures, I reiterate the point that returns depend primarily on the selection of the correct asset class and not merely stock/ MF selection or its timing.

MF investing can be an important component of one's portfolio with equity MFs being part of the overall equity allocation and debt mutual funds being part of the overall debt- equity allocation.

There is a popular belief that MFs are the appropriate vehicle for less- informed retail investors.

But given that there exists well over 3,000 MF schemes in the market, selection itself becomes nearly as cumbersome and fraught with risk as investing directly in the secondary market.

Every investor must have a clear game- plan. If the financial goals and requirements of an investor are known, then it becomes simpler to structure a portfolio.

Some of the other key factors that would be considered while structuring a portfolio include the age of an investor, risk appetite, investment horizon, tax implications and any such other criteria that could influence the portfolio structure in terms of asset allocation.

MFs also offer investors a choice to either invest in a scheme with a growth option, dividend option or dividend re- investment option.

For a younger investor without liquidity constraints, it makes sense to choose a growth option rather than a dividend option.

Given the changing demographics of modern India, a large number of Indians will fall in the 25- 35 year age bracket. In many of the cases, these investors can undertake a more aggressive investment approach.

Keeping these factors in mind, the structure of such an investor's MF portfolio would be different from that of a middle aged investor, whose likelier goal would be to secure continued revenue flows post- retirement.

Within any portfolio, diversification is crucial. Diversification under equity MFs does not mean packing one's portfolio with 25 schemes from across fund houses. It would mean investing in diverse funds with varied focal areas e. g. large cap, mid- cap, small- cap or flexi- cap.

Further, including funds based on styles and approaches to investment too, will allow further diversification and flexibility to the portfolio to capture opportunities across the market.

In the week ahead, keeping in mind that ' young India' is where the action is, we shall take this discussion forward by turning the spotlight on a few prominent equity MFs. Meanwhile, ensure your portfolio structuring and the weightage you have accorded to asset classes are optimal.

Ashok Kumar is promoter, theIPOguru. com & director, Lotus Knowlwealth

Courtesy: Mail Today