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INVESTING PRUDENCE - START WELL TO FINISH WELL


It is commonly said that “stock market tests your patience and rewards your perseverance” and this piece of advice remains relevant for all times. Human beings are emotional and sentimental, a behavioral trait, which can often be witnessed with their reaction to stock markets at different circumstances.

The sentiments are different during bull market and bear market; in bull market the investing strategy will be aggressive throwing away caution to the wind. On the contrary, during bear market the investing strategy will be highly defensive with excess of caution. These two strategies are wrong that may lead an investor not to get the best out of the opportunities that the markets offer.

The nature of the market is to be volatile with prices of stocks (and index) fluctuating all the time, and indeed this fluctuation keeps the market alive and active; it is also said that in the market “trend is your friend.”

Instead of trying to react to the market performance, which is not in anybody’s control, one has to show prudence and maturity at the time of investment itself by choosing the right mix of equity themes that are available. In fact, the themes in equity mutual funds are designed specifically to offer that diversity and options to choose from for different types of investors (risk & return profiles) across different market conditions.

The common themes are Index Funds, Aggressive Hybrid Funds, Large Cap Funds, Multi Cap Funds, Mid Cap Funds, Small Cap Funds, Thematic and Sectoral Funds; these categories form the nucleus of equity mutual funds from which the investing proposition begins.

The themes/categories mentioned herein can be further classified into Core Themes and Tactical Themes; Aggressive Hybrid, Large Cap, Multi Cap and Mid Cap Funds can be considered as Core Themes while Index, Small Cap, Thematic and Sectoral Funds as Tactical.

At the time of investing a blend of core themes should be chosen prudently with proper weights and then the schemes from the themes should be chosen. For example: 20% into Aggressive Hybrid, 20% into Large Cap, 30% into Multi Cap and 30% into Mid Cap would be ideal blend. In this portfolio 40% of the investment will be exposed to moderate themes, 30% into moderately high theme and balance 30% into aggressive.

With the suggested indicative allocation the return expectation over longer period of investing such as 5 years and more can be expected in the range of 13% to 15% annually compounded (based on empirical evidences).

It does not mean that one should not invest in the rest of the themes such as Index, Small Cap, Thematic & Sectoral funds; these themes should be added as additional investment into one’s investment portfolio when having surplus investible funds. But, the core portfolio should remain the focus to achieve financial goals.

If one has chosen an effective portfolio mix through theme selection there would be no need to panic or react during any circumstances of the market performance. Ignore market performance and stay invested until the goal is not achieved. If you start well, you will finish well.

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