Ajit Menon, Executive VP & Head (Sales), DSP BlackRock Investment Managers

Investments in equities, especially for the long term, are likely to yield the highest returns. However, for many, keeping track of markets and individual stocks is not possible and also not advisable. Especially so as professionally-managed and tightly-regulated mutual funds are available to do the same job. The endeavour here is to highlight some basic steps to consider in building an equity portfolio through mutual funds.

Identify financial goals: The process starts with identifying your financial goals. You may be looking to plan for retirement, children’s education, a marriage or buying a house. If you have a fair sense of the time frame in which to build the corpus, financial websites can help you plan for the various scenarios, including factoring in possible rates of inflation.

Risk tolerance: Identifying your risk tolerance is important. If you are young and at the start of your career, you can have an equity-oriented portfolio as you can afford to take a risk in anticipation of higher returns. Those approaching retirement or are retired should ideally have low equity exposure.

Selecting a fund house: The next step is to identify fund houses that have a pedigree in the financial services and provide funds with a consistent track record across all categories. A minimum of five years consistent returns could be a prerequisite.

Don’t switch your chosen funds or add schemes frequently, especially based on short-term performance.

Investment objective: Familiarise yourself with the investment objective of the shortlisted funds. Identify whether the fund invests across market capitalisations or limits itself to large-cap, midcap or small-cap stock baskets. Some funds could also be thematic. Most financial goals are long term and so it is better to invest in diversified funds that have broad mandates. Also consider the benchmark that the fund follows. It will give you a broad sense of whether the fund is tracking a broad index, such as the CNX 500 or the BSE 200.

Asset allocation: Selecting funds based on their investment objective brings us to the next step-asset allocation. This, for the limited purpose of the column, means you should not be putting all your eggs in one basket. A decision on asset allocation is broad and will include other investment options, such as real-estate and bank deposits.

Shortlisting schemes: You may use performance as a measure to make your final list of schemes. However, also consider consistency in performance over longer tenures, including for three, five and 10 years. Your selected schemes should ideally be those that have consistently beaten their benchmark and compare reasonably with their peers over long periods. You should also be aware that there is no advantage to over diversifying your investments. A maximum of four or five equity schemes is more than enough. To choose between two funds with a similar mandate, consider the charges for the two. A fund manager’s track record is also a factor. The longer a manager has been with a fund, the better.

Keeping track: Monitoring your investments is the next step. Ask your advisor or sign up for periodic updates on your investments. Do not be tempted to make changes in the first six months or even a year. If you have followed the steps outlined above, you will not need to make a short-term change. Changing funds also incur additional charges.

Course corrections: As long as your investments are giving you the required rate of return, don’t change your chosen funds or add funds, especially based on short-term performance. The only reason you will need to consider making a change would be if your selected scheme is trailing your required rate of return for over a year or even two.

AJIT MENON

Executive VP & Head (Sales), DSP BlackRock Investment Managers

WANT TO INVEST IN MUTUAL FUNDS? HERE ARE SOME HELPERS