You have very relevant question. Just like many investors feel confused about weightage to last one year returns and long term performance.
Many magazines and advisors suggest top-performing fund of past year or quarter. That is not time for you to buy into it. It is not advisable to sell a fund you hold just because it appears on the list of worst performers. Investment in shares are cyclical.If you overemphasize recent performance, you may be buying a fund at its peak. and you may selling a fund that is poised to do well now.
Your task as an invetor is to build a portfolio that will do well in all types of the market climates.That doesnot mean that each of your funds will be top performer every quarter. You should a portfolio which will complement each other in different environments.
If you give more weightage to one year return, and invest in such fund, there are chances that you are investing in a portfolio which is at its peak and downtrend may start. So instead of looking at last one year returns, look at the portfolio and evaluate the same for longer term performance.
Evaluation on the basis of long term performance eg 5 years, 10 years can highlight consistent performance of fund & there are higher chances that it can prove to be more rewarding.
Yes, you have very interesting question. Like you , many investors develop very large portfolio of overlapping stocks. It is very difficult to track such large portfolio.
First write down again each stock the category of it ( eg large cap, midcap,small cap etc). Also write down industry/sector against each of them . Then put stocks of each category and calculate their value and portion in your portfolio. You will realise that some stocks are some sectors have very high weightage in your portfolio.
Try to see that you have proper balance between largecap, midcap and small cap stock. Better that you have more weight to large cap and midcap compared to small cap stocks. Once you do this primary exercise, you will realise what is the problem with your portfolio.
Pl. stock related question be placed on chanakyanipothi.com
We have special Q & A section there. Here we welcome questions related to Mutual funds.
Dear Madam,
Sorry to inform, but you have created “ZOO” of Mutual fund Schemes.
Investment in Mutual funds DO requires diversification just like Equity investment yet investment in more than 12 schemes is not desirable. I think an investors should have invested in maximum 12 schemes.Even an investor with significant assets can put together a diversified portfolio with dozen funds.
Owning more causes problems in a couple of ways. First, such a large portfolio clearly suggest that an investor does not have any strategy. They simply add new funds as and when they see an advertisement or read a newspaper or a magazine..
Some investors choose a new fund each year for their retirement money, disregarding what they have already have and how the new fund fits in.
The second problem with holding scores of funds is that many of the investments will overlap. That means you will not achieve real diversification and you will pay more because you will be paying expenses on each of the funds.
The third problem is you will not able to study the performance of each of the 40 schemes. Simply tracking last one year performance is not real analysis of your investment.
To be well diversified, you want a group of funds that will perform differently in any given type of the market.
Many individual investors are not familiar with the concept of correlation. They buy a group of well known funds believing they have achieved good diversification. What they do not know is that large funds even of different fund houses are likely to hold the same well known stocks. So an investor might buy 10 funds spreading them out among different fund companies and still have done nothing to diversify.
Do Understand…Equity funds will not give steady returns each year.
Bank fixed deposits offer steady returns whereas Returns in Equity mutual funds tend to be much higher compared to Bank FDs, in the longer period, in the short span, it may fluctuate widely.
Reality is Mutual fund returns are not assured and are linked to market movement of the underlying securities. Still, there is an assumption of 12% to 15% annualised return over the long term is made when the growth rate in equity funds is referred to. However, it does not mean the growth of 12% will happen every year.
In reality, equities being volatile in nature may deliver both negative and positive returns over a period of time. The returns could be as high as 50% in one year but in the next year, the returns could be as low as 7% or even negative. Still over a long term, several studies done in the past have shown that equities drift upwards and the compounded annualised growth rate, i.e., an average return is what gets referred to.
No, Lower NAV is not a better deal !!
Let me explain with example….If you are investing in a mutual fund scheme with a lower NAV thinking it to be a better ‘deal’ than buying a fund with higher NAV, think again! Let’s say, you invest Rs 10,000 each in Scheme A (an NFO with an NAV of Rs 10) and Scheme B (an existing scheme with a NAV of Rs 20). In doing so, you hold 1000 Units of Scheme A and 500 units of Scheme B. Now, assuming both schemes have invested their entire corpus in just one stock, which is currently quoting at Rs 100, let us look at the fund value if there is an appreciation in NAV. If that stock appreciates by 10%, the NAV of the two schemes will also rise by 10%, to Rs 11 and 22, respectively. In both cases, the value of your investment increases to Rs 11,000—an identical gain of 10%.
An asset allocation-based approach (mix of equity, debt, commodities, real estate, etc.) is advisable for investing towards one’s goal. Fixed income lends stability to the portfolio, whereas equities play a crucial role in wealth generation over the long run.
Assuming a long horizon of 10-plus years given your age, you should look to invest with a portfolio mix of about 90% into equities (large/mid/small-cap/international – 40/30/25/5) and 10% into fixed-income funds. The international equity allocation offers diversification across geographies and acts as a hedge against rupee depreciation. For investment in fixed-income, you can consider fixed-income funds with a high (safer) credit quality portfolio such as banking & PSU debt funds, corporate bond funds and medium to long-term funds.
To meet long-term goals, it is always suggested that one stay invested for the long term. But market realities are such that one does see periods of expensive and cheap valuations, accompanied by periods of volatility. In such a setting, emotions, no matter how seasoned an investor is, do impact decision-making.
If you are an investor looking to deploy lump sum investment and is not sure whether to wait on the sidelines for the market to correct further or to go ahead with investment, Booster STP emerges as a viable solution.
Even if an investor has lumpsum money to invest, making the right investment decision when the market is volatile is never easy and entails high risk. While a traditional systematic transfer plan (STP) could be a good option, it may fail to capture fully an underlying opportunity. In such a period what may work the best is relying on features like the Booster STP.
In a traditional STP, an investor parks the lump sum money in a debt fund (source scheme) and instructs the fund house to transfer a fixed sum of money every month to an equity fund (target scheme) of his/her choice. But in the case of a Booster STP, the amount transferred every month to the target scheme will be variable in nature. The amount can vary in the range of 0.1x to 5x the base STP amount.
do understand, both Multicap funds and flexicap funds are expected to be meant for wealthcreations over the long term and they invest across the companies of different sectors and sizes. However multicap funds have a higher allocation towards midcap and small cap . Therefore they are more aggressive in their approach and are also more volatile then flexi cap funds.
If you are looking for an aggressive approach then you should go for Multicap fund. Alternatively go for a combination of some flexi cap fund and also midcap and small cap fund.
Focused funds have a concentrated portfolio of not more than 30 stocks.On the other hand diversified funds have large number of stocks in its portfolio.
The fund manager of focused funds take concentrated and high conviction bets on few stocks. It may turnout to highly rewarding as well highly risky. If the fund manager of focused fund proves right in his bets, the investors get bumper returns.
On the contrary, the diversified funds are less rewarding but much safer and stable.
I hope you got full understanding .