Disciplined Investment And Asset Allocation Remains Key

Investing in mutual funds is undoubtedly one of the best ways to create long term wealth. Mutual funds invest in the markets, so your money can grow faster than inflation. The benchmark index Sensex returned 18.74 per cent in 2023, and while every year may not be such a good year, one needs to stay invested to benefit from India’s growth story. 

Recently, the markets have remained volatile, and we have seen a lot of profit booking, so your mutual fund portfolio may also have been hit. What should you do now? We spoke to the experts to find out. 

Stay Disciplined 

Investors should know their risk appetite, be well diversified and continue their investments. Markets don’t give guaranteed returns, or do they?  

“Since Inception for the Sensex, every year there have been periodic falls of 10-20 per cent. Yet by every year end, three out of four years have closed positively. Therefore, investors shouldn't worry about volatility and continue to invest in a disciplined manner,” says Siddharth Alok, AVP Investments, Multi Ark Wealth-Epsilon Money, an online platform that provides financial planning solutions. 

As an investor, having the right expectations is the key to achieving investing success. “We have seen a runaway rally over the last three to four years and the equity markets are currently trading at a premium. This should be a time to reduce return expectations and ensure your portfolio risk is aligned with your investment horizon. A volatile market will reward investors who invest in a disciplined manner with patience,” says Harsh Gahlaut, Co-founder & CEO, FinEdge, a wealth management firm. 

Invest systematically, with a long-term horizon and do not make investment decisions based on fear or greed. It is important to seek professional advice and invest with clear goals and an asset allocation clearly aligned with these goals.

Stick To Your Asset Allocation 

Experts will say that asset allocation is the most important thing to keep in mind when investing. This simply means that you should not put all your eggs in one basket. Hence you should not invest all your money in equity but also keep a certain portion in debt. Even within equity, if you are investing through mutual funds, you should spread your investments across various fund categories. 

Over the past one year, small cap funds as a category have given returns of over 50 per cent, while large cap funds have given lesser returns in comparison. So, let us say you had an asset allocation where you were investing 10 per cent of your portfolio in small caps, the asset allocation would have got skewed towards small caps. Hence it is important to rebalance your portfolio and bring it back to the desired levels. 

If an investor's mutual fund portfolio is heavily tilted towards small and mid-cap funds due to their recent great returns, it may be wise to rebalance. "These sectors have experienced exceptional performance, but such returns are not sustainable in the long term. Investors should consider booking some profits and reallocating to other segments to reduce risk. Maintaining a balanced portfolio aligned with one's risk tolerance and investment horizon is crucial,” says Soumya Sarkar, Co-Founder of Wealth Redefine, an Association of Mutual Funds in India (AMFI) registered mutual fund distributor. 

Focusing solely on mid and small cap stocks is thus not advisable, especially given their recent rapid rise. “A balanced approach would involve allocating 25 per cent of an investor’s capital to mid and small cap funds to capitalise on their upward trend. The majority of the capital should be directed towards quality large cap stocks or different assets, which offer greater valuation comfort and stability. This strategy ensures a more prudent and diversified investment portfolio,” says Umeshkumar Mehta, CIO, SAMCO Mutual Fund.

So, the markets may and will go up and down, but if you stick to the basics, you will be sorted!