Samvat 2083: How should mutual fund investors rejig their portfolios?

As Indian investors step into Samvat 2083, Diwali offers an opportunity to review their mutual fund portfolios and align their investments with their financial goals. However, amid market volatility, changing valuations and varying performance across mutual fund categories, choosing the right schemes and deciding when to adjust portfolios can be challenging.

To help investors navigate the new Samvat, ETMutualFunds spoke to mutual fund advisors about how they should approach their SIPs, choose fund categories, review underperforming schemes and rebalance their portfolios.

Rajesh Minocha, a Certified Financial Planner (CFP) and Founder of Financial Radiance, told ETMutualFunds that investors should not stop their SIPs because of market volatility. Instead, they are better off continuing their investments than trying to time the market. He also suggested increasing SIP contributions by 5-10% annually as income rises, rather than directing the additional money solely towards lifestyle upgrades.

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If investors find market valuations uncomfortably high, they may consider deploying lumpsum investments in tranches over three to six months. Market predictions matter less than maintaining discipline and sticking to the right asset allocation, he added.

Krishanu Choudhary, Director and Unit Head at Anand Rathi Wealth Limited, told ETMutualFunds that investors should stay invested and avoid reacting to short-term market volatility. SIPs are designed to help investors navigate different market cycles. During market corrections, the same SIP amount allows investors to accumulate more units at lower prices, which can work in their favour over the long term.

Any increase in SIP contributions should be based on an investor's income and financial commitments. Market volatility alone is not a reason to increase SIPs. Investors with surplus funds can consider staggered lump-sum investments to spread their investments across different market levels. Staying consistent with SIPs is far more important than trying to time the market, he said.

Mutual fund categories to consider in Samvat 2083

With several mutual fund categories available, investors often find it challenging to decide which ones deserve a place in their portfolios. From large-cap, mid-cap and small-cap funds to flexi-cap, multi-cap and hybrid funds, the choice should depend on an investor's financial goals, risk appetite and existing asset allocation rather than recent performance.

Investors should also review schemes that have consistently underperformed or delivered negative returns and assess whether the reasons for underperformance are temporary or point to deeper concerns.

While a few months of weak returns may not justify an exit, prolonged underperformance against benchmarks and peers, or significant changes in a fund's management, investment strategy or mandate, could warrant replacing a scheme.

Choudhary expects market participation to broaden across large-, mid- and small-cap companies in Samvat 2083 as earnings growth normalises and large-cap businesses start seeing an improvement in performance.

“Investors can consider large-cap, mid-cap, small-cap, large and mid-cap, flexi-cap and multi-cap funds, along with strategy-based categories such as dividend yield and focused funds. A combination of these categories can help investors achieve a balanced market-cap allocation of 50-55% in large caps, 20-25% in mid caps and the remaining allocation in small caps. This can help spread investments across market segments and reduce concentration risk.”

On underperforming schemes, Choudhary advised investors against rushing to exit a mutual fund simply because it had delivered negative returns or underperformed over a few months. However, if a fund has consistently underperformed its benchmark and peers over three to four years, it may be time to reconsider the investment. Significant changes in a fund's investment strategy, fund manager or portfolio may also warrant a closer review.

Minocha, meanwhile, recommended diversifying portfolios across different fund categories, including flexi-cap, large and mid-cap, multi-cap and hybrid funds such as multi-asset funds, depending on an individual's existing investments and risk tolerance.

He also cautioned against holding on to funds solely because of their past performance. Rolling three- to five-year periods of underperformance, along with changes in fund management or investment mandate, should prompt investors to consider removing such schemes from their portfolios. Short-term returns alone, however, should not be the basis for exiting a fund, he said.

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Mistakes to avoid

As investors review their portfolios in the new Samvat, the temptation to chase recent winners or make frequent changes based on short-term market movements can be difficult to resist. Strong returns in a particular category may encourage investors to increase their exposure, while underperformance may prompt them to exit schemes prematurely.

However, frequent portfolio changes, overlapping investments and decisions made without clear financial goals can undermine long-term wealth creation.

Minocha said investors should avoid chasing past winners when making investment decisions. They should also steer clear of inadequate diversification, frequent rebalancing, which can have tax implications, and investing without specific financial goals. Trying to time the market during volatile phases is another mistake investors should avoid.

Following a disciplined investment approach matters more than accurately predicting which investment category will perform best, he said.

Choudhary said one of the biggest mistakes investors should avoid in Samvat 2083 is stopping their SIPs whenever markets turn volatile. During market declines, the same SIP amount allows investors to accumulate more units at lower net asset values, which can work in their favour over the long term.

Investors should also avoid chasing asset classes or mutual funds simply because they have delivered strong returns recently. For instance, increasing exposure to gold solely because of its recent performance may not be the right approach. Similarly, selecting mutual funds based on their recent returns may not work in an investor's favour.

Another mistake is holding too many mutual fund schemes with similar underlying portfolios. This can increase exposure to certain companies without necessarily adding diversification. Making fresh investments without a clear financial goal or investment horizon can also hurt long-term wealth creation.

Instead, investors should focus on building a well-diversified portfolio that reflects their financial goals and investment horizon, rather than making decisions based on what is currently performing well in the market.

Diversification beyond equities and debt?

With gold and silver attracting investor interest and newer investment avenues such as specialised investment funds (SIFs) entering the market, investors may be considering whether to diversify beyond conventional equity and debt mutual funds. At the same time, strong returns in certain mutual fund categories may have pushed some portfolios away from their intended asset allocation.

The key question is whether investors should introduce additional categories, book profits after a strong rally or stay invested to meet their long-term financial goals. Experts believe such decisions should be guided by an investor's overall asset allocation, risk appetite and investment horizon rather than recent returns.

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Choudhary said investors should determine their asset allocation based on their financial goals, the corpus they need to build and their investment horizon, rather than adding new investment products simply for the sake of diversification.

For investors with a long-term investment horizon, he recommends an 80:20 allocation to equity and debt. The equity portion can be invested in actively managed, diversified equity mutual funds, while the debt allocation can be split between arbitrage funds for investors in the highest tax bracket and target maturity funds for those in lower tax brackets. Investors can also consider allocating 10% of their debt portfolio to gold ETFs.

Choudhary advises investors to be cautious about adding silver ETFs and SIFs to their portfolios. While silver has delivered strong returns in recent years, much of this outperformance has been driven by speculative activity in global markets. He does not consider this a sufficiently reliable option for long-term investments.

SIFs are a relatively new category, with only a few asset management companies offering these products. Their performance and associated risks are still being assessed, and he believes investors should avoid them for now.

On profit booking, Choudhary said investors should not rush to sell mutual fund investments simply because a particular category has delivered strong returns. However, booking profits can make sense when it is part of portfolio rebalancing.

For instance, if a sharp rise in equity markets pushes the equity allocation well above the intended level, investors can book some profits and shift the money into other asset classes to restore their original allocation. They can also make use of the annual ₹1.25 lakh exemption on long-term capital gains. Utilising this exemption every year could help investors save a meaningful amount in taxes over a longer investment horizon, such as 20 years.

Investors should therefore consider booking profits when their portfolios need rebalancing, make use of available tax benefits and remain invested in funds that continue to align with their long-term financial goals.

Minocha said gold and silver ETFs or mutual funds can be useful additions to a portfolio as they offer diversification. However, they should account for only a small portion of an investor's overall portfolio.

Alternatively, investors can gain exposure to these commodities through multi-asset funds, where the fund manager determines the allocation across different asset classes.

Minocha said SIFs are meant for sophisticated investors who understand the strategies, risks and higher investment thresholds associated with these products. They are not a necessary addition to every investor's portfolio.

On profit booking, he advised investors to regularly review their asset allocation and rebalance their portfolios if exposure to a particular asset class increases disproportionately relative to their financial goals. Investment allocation decisions should not be driven primarily by returns.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)


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