17 NOVEMBER, 2020

Equity markets have rallied sharply since April’20 and after falling significantly in March’20, with most of the index stocks continuing to show a growth trend. Though macroeconomic conditions have deteriorated due to the pandemic, high frequency indicators are showing signs of revival and hence equity markets have seen  interest in buying. Easy liquidity stance by central banks globally, unlocking the economy by government, share buy-back by the promoters, and mergers & acquisition (M&A) activities have also supported the buying interest in equities. While uncertainty over the launch of vaccine, second wave etc. & its impact on economic recovery still prevail, retail investors are buoyant about stocks that might be part of the wave of growth. In such a scenario, the hunt for unpolished diamonds may be a tactical move, the broader focus should always be on the long term growth of the portfolio.

Direct equity investors often see Mutual Funds as a slow, boring path to investment growth. Yet, the truth remains that over the long term, a consistent game-plan to investing always yield better & consistent returns than a piecemeal approach of chasing the next wave. The probability of making a huge positive upside on a single investment is relatively low, and historically less diversification has costed investors dearly. In addition to this, timing the market has practical challenges, since investors may miss either side of the trade i.e. buying or exiting a stock at the lowest or highest price due to the greed & fear factor that drives the market sentiments. On the other hand, mutual fund portfolio managers with their skill and experience in managing large pool of public money uses a research based and disciplined approach while investing in stocks. They purchase a stock seeking based on deferent parameter including long-term growth in corporate profitability and exit when the stock valuations reach their target levels. They also diversify their portfolio by investing across various sectors and companies to mitigate risks from few stocks.

The important factor here is the ability of professional fund managers to better anticipate and recognize patterns as they emerge, and the speed at which they can pivot changes in order to lower risks on their portfolio from adverse market conditions as well as capture upside when opportunities for growth present themselves. At times, retail investors may be at risk by the inherent bias of having bought into a company, and then taking time to realize that the potential growth may not materialize even in the face of negative indicators, resulting in an erosion of their invested capital.

For this reason, it is important to have a balanced and structured approach towards investing. While the opportunity to make quick gains should not be sacrificed altogether, it is prudent to keep such investments limited to a small portion of the portfolio in order to reduce the downside. A steady investment in mutual funds, linked to specific goals is likely to yield better long-term returns, without the investor having to continuously monitor and evaluate the investment. The second advantage of this strategy is that with a diversified portfolio spread across sectors, mutual funds are more capable to deliver better aggregate returns as the spread of investments across sectors may lead to  a better chance of success rather than putting a larger proportion of funds in single or few companies in the hope of finding a multi-bagger.

While creating and maintaining an investment portfolio, doing so with a clear objective and timeline is a positive way to success. For example, if you are creating a portfolio for your child’s higher education needs, planning for an allocation towards international funds may be useful, as this will hedge your dollar requirements over the long term. Similarly, a portfolio designed to plan for retirement may focus on long-term growth funds if you are in your 20s or 30s. Those close to retirement may look to invest some money in funds yielding steady dividends with some focus on growth to counter the impact of inflation in the years post-employment.

While looking at these, the question may arise that, if the market has seen a rally over the last 6 months, is it likely to show further significant returns when invested into at a broader level like a mutual fund. The truth is that in the long run, markets mostly deliver positive returns and a professional fund manager with a consistent performance track record is likely to identify growth opportunities while lowering the risks. In the likelihood of further uncertainty on the economic front, this is far more reassuring than having to make your own bets on the market.

In short, a few fundamental rules should always be followed while keeping track of your portfolio. These are:

  • Invest with a clear purpose and end-goal in mind and stick to it.
  • May keep scope for quick returns in the form of direct equity investments, but do not get carried away as it can erode capital base fast.
  • A professional manager will always outperform the majority of the market in terms of delivering returns due to the spread of risk and likelihood of better returns due to diversification of the invested capital.

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