Mutual funds are the safest and easiest way to enter the stock market. Still, investors must have the discipline to ensure the success of their investments. Here are seven broad points or takeaways that Radhika Gupta, the managing director and chief executive officer of the Edelweiss Mutual Fund, highlighted in a Twitter post recently that will be useful for newcomers and old hands in dealing with mutual funds. Gupta, who is also the vice chair of the Association of Mutual Funds in India (AMFI), says that while the ease of investing and redeeming in mutual funds is “fabulous”, it has also been “underrated”. Highlighting the investing disciplines, she recounted her own approach or actions that helped her mutual fund portfolio.
In her message, Gupta lastly stressed that investors should “always remember that personal finance is personal”, hoping the “takeaways would be useful to a broader group.”
Here are seven takeaways from Radhika Gupta’s approach to mutual fund investments.
Evaluate The Funds Every Five Years: “I do a once-in-5-year major relook at the funds and asset allocation in my portfolio. This is the time when I make big structural changes,” says Gupta. She believes that goals, circumstances, and needs generally change over this period, giving her enough time to evaluate the fund managers fairly.
In the interim, she primarily buys and holds her assets. “I add to the same asset allocation and funds broadly unless there is a real pull factor—market or personal or fund news—that calls for a change. Also, my portfolio is heavily Edel, but I have other AMCs.”
Consistency Of The Fund: The regularity of a fund’s performance is critical. Try avoiding funds that may swing from one extreme end to another. “I much prefer the one that isn’t top of the charts yet never swings to the bottom. Consistency is my preference,” says Gupta.
She adds, “Over a long period, all funds have done decently; some have seen more extreme good and bad performance. Not something I have liked since it makes me question the fund.”
SIPs Work Well: The monthly systematic investment plans (SIPs) always work well. She believes that because of SIPs, investor performance has nearly always helped triumph over fund performance. “Even absolute SIP performance is heartening14%+ in BAF (balanced advantage fund) categories and 18%+ in midcap categories,” she says. One should also focus on the asset management company’s (AMC) area of speciality and allocate that scheme to it. In addition, investors should periodically relook at their SIP amounts with rising incomes. They can target a post-tax savings amount to boost their SIP investments.
AMC Size Doesn’t Matter: While investing in mutual funds, the size of the AMC should not matter much. Avoid schemes where size has ballooned, especially in the small-cap category, despite how good their performance has been.
Restrict Schemes To A Few Broad Categories: It may not be easy to select from so many categories of funds, but try restricting them to a few instead of going after everything being thrown at you. “I now have broken my approach into 6 categories, and in each, I have 1-2 schemes making for 10 funds. They are flexi/large and midcap, midcap, small-cap, asset allocation funds, Indo global funds (tax efficient), and pure global funds, which is a new addition for tax reasons, although I have still kept a pure-play international fund,” she says.
Expense Ratio Isn’t A Factor: The expense ratio should not be a major concern if the fund’s performance has consistently good. “I am not obsessed with fees. There has been more than once when I picked a fund and paid 10 bps more because I was more comfortable with the manager/product,” she says.
Diversification Is Also About Approaches: Portfolio diversification is not just about having different asset classes but getting different approaches and ideas that may perform well at other times. “Outside of Edel, I don’t allocate more than one scheme to an AMC, and I try to look at houses with distinctly different styles,” says Gupta.