The two questions I’m often asked in these turbulent times are: ‘Where do I invest?’ and ‘How much money should go into debt and equity?’ A few years ago, investing meant putting money in a bank deposit or buying equity shares. Creating wealth meant buying property. And then came mutual funds. No wonder investors are confused.
Today, one can invest in debt funds (subclassification by quality of issuer and maturity period), equity funds (sub-divided into market cap, sectors, themes and mixed with other asset classes), real estate and commodities funds... now even strategies funds. Debt funds invest predominantly in interest (coupon)-bearing securities like CDs, CPs and debentures. Usually, such funds account for 50-90% of a portfolio depending on the risk appetite.
Today, one can invest in debt funds (subclassification by quality of issuer and maturity period), equity funds (sub-divided into market cap, sectors, themes and mixed with other asset classes), real estate and commodities funds... now even strategies funds. Debt funds invest predominantly in interest (coupon)-bearing securities like CDs, CPs and debentures. Usually, such funds account for 50-90% of a portfolio depending on the risk appetite.
Equity funds account for 10-40% of one’s portfolio. For most investors, diversified equity funds are ideal. I believe sector funds should be avoided; single sectors tend to perform well for a few years, then subside for long periods. In India, index funds, ideal for the investor sensitive to costs, are not widely available. Exchange traded funds are semi-closed-ended index funds, which track the index on which they are based.
Real estate and commodity funds are ideal for people who like this asset class but want liquidity and professional advice in this sector. Ideally, high net-worth individuals should go for these.
Till recently, funds based on strategies were not available in the mutual fund format and were in the realm of hedge funds. Let me explain. Arbitrage is a strategy where the fund manager buys a stock or its derivative and sells either, making money from the spread between the prices.
Even more exciting are funds that identify the inverse correlation between the short-term performance of two companies and buy (go ‘long’ on) one while selling (go ‘short’ on) the other. Here again the fund manager is not concerned with the movement of the stock market. As long as there is a gap between long and short, his strategy helps make money. Of late, such funds have become available to Indian investors too.
As for investing, the short-term (one to five years) movement of the stock market does not change one’s risk profile or asset allocation. So the answer to the question, ‘Where should I invest in this bad market?’ is that you should act in the same way as you would in a normal market. Once the risk profile and asset allocation are determined, the portfolio should be divided into:
1. Core equity (index funds, diversified equity funds): Invest through SIP
2. Core debt (long-term debt funds, Gsec funds): Invest through SIP
3. Wraparound funds (strategies, sector funds, real estate): Invest lump sums to create an additional nest egg
4. Managing cash flows that will be required in the short term (liquidity funds (one day to two months)/short-term funds (two months to one year))
So work with your adviser to get a sensible risk-profiling and asset allocation plan and review it regularly.
Real estate and commodity funds are ideal for people who like this asset class but want liquidity and professional advice in this sector. Ideally, high net-worth individuals should go for these.
Till recently, funds based on strategies were not available in the mutual fund format and were in the realm of hedge funds. Let me explain. Arbitrage is a strategy where the fund manager buys a stock or its derivative and sells either, making money from the spread between the prices.
Even more exciting are funds that identify the inverse correlation between the short-term performance of two companies and buy (go ‘long’ on) one while selling (go ‘short’ on) the other. Here again the fund manager is not concerned with the movement of the stock market. As long as there is a gap between long and short, his strategy helps make money. Of late, such funds have become available to Indian investors too.
As for investing, the short-term (one to five years) movement of the stock market does not change one’s risk profile or asset allocation. So the answer to the question, ‘Where should I invest in this bad market?’ is that you should act in the same way as you would in a normal market. Once the risk profile and asset allocation are determined, the portfolio should be divided into:
1. Core equity (index funds, diversified equity funds): Invest through SIP
2. Core debt (long-term debt funds, Gsec funds): Invest through SIP
3. Wraparound funds (strategies, sector funds, real estate): Invest lump sums to create an additional nest egg
4. Managing cash flows that will be required in the short term (liquidity funds (one day to two months)/short-term funds (two months to one year))
So work with your adviser to get a sensible risk-profiling and asset allocation plan and review it regularly.
Source:http://moneytoday.digitaltoday.in/index.php?option=com_content&task=view&issueid=53&id=3974&Itemid=1§ionid=106
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