From Director’s Desk | Anirudh Dar
Can you ever protect yourself fully against an eventuality in your life? Or, can you do a better job to protect yourself from an eventuality? Both questions sound incredibly similar but have such contrasting meanings. Building a mutual fund portfolio is no different. While you may not be able to protect yourself entirely from losing capital, but how much you lose is certainly controllable, or at least, sometimes is. Let us understand more.
The first step to building a mutual fund portfolio is to understand your risk. Risk is defined as a state of uncertainty and can be understood in two different ways. Risk Appetite which is your willingness to take risk and Risk Tolerance which is your ability to take risk. Both are different from one another because they rely on different aspects of your life. But more on risk another time.
The second step is to define your time horizon for making and holding these investments. Here too risk plays an important part. If you are an extremely aggressive investor but are saving to buy a car in the next 12 months, there is no way you can afford to make aggressive investments simply because the risk is too great. So, you will need to go against your own grain and invest in something defensive where capital protection is more important than capital appreciation.
The third is to define an asset allocation. Simply put, you must diversify your investments into equities, debt, gold and liquid investments. The question is why? The answer is simple. Most asset classes work differently to each other at the same time and most have better years than others depending on prevailing markets. For example, equities have underperformed in the last 24-36 months whereas Gold has doubled. The advantage on being invested in different asset classes is to ensure that you don’t miss on potential gains when one is performing better than the other.
Finally, choose funds using a CORE and SATELLITE strategy.This means that select about 70% funds which will form the core of your portfolio for several years. Satellite means these are shorter term or “opportunistic” ideas or themes that will carry more risk but can do exceptionally well. For example, Pharma Funds are a great satellite bet for now given the current pandemic and this sector being in focus. Certain US-based funds are the flavor with the tech heavy NASDAQ hitting new highs every week.
In conclusion, if you have understood how to align these points well, you are doing a job of protecting yourself from stock market heartaches better than a lot of the others.