Use this twin approach to make the most of your equity mutual fund investments in a distressed market

4 MinsMay 06, 2020

The Indian equity markets are likely to remain volatile for some time due to the coronavirus pandemic. The possibility of a further correction also cannot be ruled out and the bottom is unknown. This is owing to the repercussions on global trade (with travel bans imposed), bottlenecks in doing business (due to supply chain disruptions) and a slowdown in corporate earnings and global growth prospects.

Hence, set realistic post-tax return expectations from your investment portfolio. Don't get carried away by the earnings trap (where often the near-term estimates are toned down while the future earnings estimates are increased).

distressed market

The performance of equity-oriented mutual funds depends on the performance of their underlying portfolio constituents. Remember, not all types of equity-oriented mutual fund schemes have fared well in the last couple of years. Therefore, you need to devise a sensible investment strategy to build a portfolio of worthy mutual funds.

Diversify your portfolio using Core & Satellite approach

In current times it would be wise to build a portfolio of equity mutual funds using the ‘Core & Satellite’ approach – a time-tested strategy followed by some of the most successful equity investors.

  • The term ‘Core’ applies to more stable, long-term holdings of the portfolio; while the term ‘Satellite’ applies to the strategic portion that would help push up the overall returns of the portfolio, across market conditions.
  • The ‘Core’ holdings should form a major portion (around 65-70%) of the mutual fund portfolio and ideally should consist of a Large-cap Fund, Multi-cap Fund, and a Value style fund.
  • The ‘Satellite’ holdings, on the other hand, will help seek high-growth opportunities and should constitute around 30-35% of your overall equity-mutual fund portfolio. The ‘Satellite’ holding should comprise of a Mid-cap fund, Large & Mid-cap Fund and an Aggressive Hybrid Fund. And if you are willing to assume very-high risk, a small portion could be allocated to a Small-cap Fund.
  • Overall with this approach, you should keep an investment time horizon of least around 7 to 8 years. The ‘Core & Satellite’ approach would help you get the best of both worlds, i.e. short-term high-rewarding opportunities and long-term steady-returns. Plus, it will ensure that your equity mutual fund portfolio is optimally diversified (and not over-diversified).

[Also Read: Investment lessons from the coronavirus pandemic]

Invest in a combination of staggered lump sum and SIP

  • To invest, you could do staggered lump sum investments and/or Systematic Investment Plans (SIPs) in the type of schemes discussed above. Know more using Axis Bank's SIP calculator.
  • If you are already SIP-ping into some of the best mutual funds schemes, do not discontinue or stop SIPs as that would apply brakes to the process of wealth creation.
  • You can also invest lump sum amounts at regular intervals, whenever possible. You don’t even have to select new funds. Just invest the additional amounts in the existing funds where you already have a SIP, if it is performing well.
  • This way you can benefit from the volatility in the equity markets. Don’t attempt to time the market or invest when the market is down, as that is difficult to predict in such uncertain times.

Review your portfolio

  • While it is tough to identify and pick out top-performing stocks or mutual funds in a market that is facing pressure from multiple factors, one precaution you should follow is to review your portfolio more regularly.
  • If you normally do it once in a year, do it once in six months during such times.
  • There may be funds where you could stop your SIP if it has performed too poorly compared to its category. Instead, you could route the SIP amount to a better performing fund in the same category to maintain your asset allocation.
  • On the other hand, if your investment is linked to your goal and on track to achieving it, simply leave it untouched even if returns seem volatile for now.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision

Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. *T&C apply