Creating a mutual fund portfolio is not so tough in today's time. However, choosing the right funds, right allocations and right investment goals is something that comes with experience in the market. The ever-so-volatile nature of stock markets may sound scary at first but with the right strategies you can achieve decent returns without doing much. In an ET Markets exclusive interview, Chethan Shenoy, Executive Director & Head of Research & Product at Anand Rathi Wealth Ltd opened up about the strategies that investors can use to create a stable fund portfolio in 2024. Edited excerpts:
Q. What is the first step when it comes to portfolio creation?
Always set a target and an EMF alpha target. For example, a 12% portfolio return target and a 3% equity MF alpha target above the Nifty 50. The next step is deciding on asset allocation. You must opt for asset classes that have a low correlation. Debt and Equity have a low correlation, and a combo of these two assets can help in targeting a return of around 12% based on your horizon of investment. EMF has delivered an average return of 12-13% over the long term, and Debt MFs have approximately delivered a 7% return. In the Debt portion, consider funds with a roll-down strategy or arbitrage funds. Gains from arbitrage are treated as equity gains, qualifying for a lower tax rate as compared to normal debt funds.
Now, to achieve your return targets, you need to decide on the asset allocations accordingly. Say, equity return is expected around 12% and alpha is 3%, then your equity portfolio is expected to deliver 15%, whereas debt will deliver around 7%. The rate of inflation should be kept in mind as well.
AgenciesQ. What type of funds can one take a look at when it comes to arbitrage and roll-down strategy?
A. Invesco India Nifty G-sec Jul 2027 Index Fund-Reg(G) (7.1%), Nippon India Nifty G-Sec Oct 2028 Maturity Index Fund-Reg(G) - (7%), SBI Arbitrage opportunity Fund Reg(G) (6.8%) and Kotak Equity Arbitrage Fund Reg(G) (6.8%) are some funds that you can consider when it comes to the debt portion.
Q. What about equity? How much and which types are best fitted when it comes to equity?
For equity, fundamentals like earnings, valuations, liquidity flows, interest rate scenarios, etc are quite essential to take into consideration. Based on current earnings potential, valuations, and liquidity inflows, we believe that the current ideal market cap allocation is as follows:
1. Largecap allocation: 50%
2. Midcap allocation: 20%
3. Smallcap allocation: 30%
Q. Which type of equity funds can be looked at when it comes to equity?
AgenciesQ. How should an investor choose sectors or stocks for his/her portfolio?
A. It is advised that you rely upon the expertise of the fund manager for sector selection and stock selection, especially, if you are a new investor.
Q. How many mutual funds should an investor keep in a portfolio?
A. Avoid over/under diversifying portfolio. Both scenarios are not ideal, an over-diversified product impacts the returns of the portfolio, and an under-diversified portfolio increases concentration risk at AMC or fund level. This risk needs to be kept at a minimum through maintaining an asset allocation strategy with a maximum of 10-15 funds in the portfolio.
Q. What should investors do if they see the market falling? It is quite tough for new investors to hold on during these times. What's your suggestion?
A. One cannot lose patience when there are market swings. In such difficult times, stay invested in the market and don’t panic sell, stick to your asset allocation strategy and invest any lump sum available. In case of market dips from peak to trough (greater than 10%), you may rebalance your portfolio in case of any deviations from your asset allocation.
Q. How often should one check portfolio performance?
A. Investments should be based on strategy and should be allowed to build over a while say 1-2 years. Ideally, one should review their portfolio at least annually.
Q. What should be avoided as an asset allocation?
Avoid investing in real estate as an investment as it lacks liquidity. The average return on real estate is 6-7% and it is not divisible and has higher transaction costs involved.
Disclaimer: Recommendations, suggestions, views and opinions given by the experts/brokerages do not represent the views of Economic Times.
