Checklist for Investing in a Mutual Fund

Mr. Nimesh Shah

Do you know why most investors are not able to build a successful strategy when it comes to mutual fund investing? That’s because investors fall prey to randomly investing in the market without a proper plan.
A simple checklist approach is likely to aid the investor in making an informed choice rather than random one. Presented here is a six point checklist.
Seek Guidance from a Financial Advisor
A great way to begin and avoid being overwhelmed by the financial market is to avail the services of a financial advisor. An advisor will guide you to make a proper financial plan tailored to your financial situation by taking into consideration a variety of factors such as your risk taking abilities, income, assets, and more importantly your financial goals. Only after careful consideration and discussion will an advisor recommend investment strategies and the quantum of investment, including funds and other instruments that you could invest in order to meet your goals.
To keep your personal finances on track, it is also necessary to review the financial plan at regular intervals.
SIP through Market Cycles
A systematic investment plan (SIP) is a strategy that encourages regular investments in financial assets. In order to ensure that you maximize on the power of your SIPs, you have to continuously invest across up and down cycle of the market. Investors tend to stop their SIPs during the times of market corrections, but it must be realised that such times are the best times to invest in the markets as you have the opportunity to invest at better valuations now than you were having some time back. Investing through the market cycles helps you benefit from higher allocations during the market corrections and also let your portfolio participate in the market rallies.
Compounding is another ancillary benefit that will aid you in the long run. Keeping SIPs going throughout market cycles sets the stage for long-term growth for your portfolio. Here is how regular investing through SIPs helps your portfolio:
Monthly Investment
Investment Period Amount Invested Portfolio Value
Rs. 10,000 10 years Rs. 12 lakhs Rs. 32.35 lakhs
Rs. 10,000 15 years Rs. 18 lakhs Rs. 53.92 lakhs
Rs. 10,000 20 year Rs. 24 lakhs Rs. 106.41 lakhs

For the purpose of the above table, a monthly investment of Rs. 10,000 in S&P BSE Sensex has been assumed. Period for 10 year returns – 1st July 2008 to 30th June 2018, 10 year returns – 1st July 2003 to 30th June 2018 and 10 year returns – 1st July 1998 to 30th June 2018.
Do Not Ignore Debt Mutual Funds
Diversification between asset classes is the key when one is building long-term wealth. When one is clued in to investing into equities given the possibility of high returns over long term, it is important to remember to add debt mutual funds to one’s portfolio to strike the balance required. Debt mutual funds invest in a variety of fixed-income assets like government securities, short-term paper, T-bills and corporate bonds, and so on. The presence of debt helps to reduce the risk element of one’s portfolio too, given the periodic repayments of interest making it a steadier asset class.
Debt funds mainly aim to generate returns from accrual income and potential capital appreciation through the changes in the interest rates and credit ratings. While the duration funds are primarily aimed at benefiting from the interest rate movements, accrual funds aim at targeting the fixed income securities with higher yield-to-maturity so as to generate relatively predictable returns for the investors.
Include Large-Cap
Your core investing plan should include large-cap and balanced advantage funds. That’s because large-cap stocks have a lesser propensity to fluctuate owing to their robust balance sheet and steady growth. Having a large-cap bias for your investment plan also helps you to choose the sector leaders across multiple sectors instead of having too many stocks confined to a single sector. Large cap stocks have steered through their journey of growth with their strong fundamentals and capable of delivering consistent long term returns. As a result, a large cap fund can act as an anchor to one’ equity investment and should remain a part of the core allocation.
Follow Asset Allocation
If one wants to get better investor outcome, consider asset allocation. You need to have a suitable investment mix of investments in your portfolio which includes equity, debt, gold and other asset classes, as deemed fit by a financial advisor. Such an arrangement ensures that even in case one or the other asset class fails to perform as expected, the overall impact on the portfolio is tempered.
However, at this point it is important to note that making an asset allocation once and forgetting it is not the way. Based on the decision made with the financial advisor it is important to see that the portfolio is re-balanced as and when required. For example: If the initial allocation to equity was 50%, and thereafter it rises to 70%, to maintain your asset allocation you will cut back on equity by 20% and allocate more to other asset classes. This ensures that your portfolio allocation is as per the desired level, aiding the objective of long-term wealth building.
Go for Dynamic Plans in Current Market Conditions
When investing lump sum in current market condition it is important invest in dynamic asset allocation funds.
Dynamically managed funds shift between equity and debt depending on the market valuation. i.e. when equities valuations rise, these funds automatically switch to debt investments thus booking profits for you at higher levels. And when equity markets correct, such funds build up position into equities, thus ensuring you are buying equities at lower prices, essentially following the Buy Low Sell High philosophy. As such, it helps you avoid emotional bias as the investing decisions are based upon the valuation metrics.
Such an investment strategy ensures that the portfolio is primed to tap into various market opportunities most of the times.
(The author is MD & CEO ICICI Prudential AMC)