4 Steps To Take With Your Mutual Fund Portfolio

With both Equity & Debt markets playing spoilsport for the better part of the past one year, many Mutual Fund investors, especially those who optimistically migrated away from the Fixed Deposits, now find themselves between a rock and a hard place. The stellar returns earned by most equity Mutual Fund investors in the previous calendar year and only served to increase the frustration, as many investors went into the new year with similar return expectations. If you’re a Mutual Fund investor, here are five simple – yet powerful – things you can do to keep yourself on the right track.

Increase your SIP’s

Many investors who commenced their SIP’s post the tearaway bull run of 2021, are actually still in the red, much to their disappointment. However, stopping your SIP’s with the intention of re-starting them at a “better time” is a step that’s bound to backfire in the long run. SIP’s work on the principle of long -term rupee cost averaging, and history is replete with examples of low-return phases that suddenly gave way to high return phases, balancing out overall returns in the process. Keep them running resolutely – and preferably, step them up

Throw in some Small Caps

Within your equity portfolio, it’s time to add some small cap funds to your portfolio now. While large cap valuations haven’t corrected very significantly, small cap valuations have. In fact, the P/E ratio of the NSE Small Cap 250 index has fallen from 60X plus two years back, to sub 30X levels today. This figure is quite reasonable by historical standards, and it makes sense to allocate around 20% of your equity portfolio to Small Cap Funds now, through 3–5-month STP’s (Systematic Transfer Plans).

For your medium-term goals, switch to DAAF’s

If you’ve got financial goals that are between 3-5 years away and your money is still parked in pure equity funds, consider switching them to high quality Dynamic Asset Allocation Funds. This category of funds continuously rebalances their portfolios between equity, hedged equity and debt securities based on valuation multiples such as P/BV, P/E, M Cap/GDP or a combination of these. In volatile, directionless equity markets such as these, they provide good risk adjusted returns that are more tax efficient than debt funds returns.

Manage your Expectations

Every market cycle provides different return generation opportunities, and aligning expectations to them based on common sense and rational analysis is not just the key to avoiding disappointment, but to ensuring that you take fewer emotional investment decisions as well. With the sort of headwinds plaguing both equity and debt markets right now - ranging from global risk off sentiment, geopolitical tensions, inflation nearing 7 per cent and impending rate hikes, we may well see muted returns from equity funds for the medium term. The simple strategy would be to invest systematically and with your goals in mind, without chasing short term returns. Returns are an outcome of time, plus correct investing behaviours.