BackSehwag, Dravid or Gavaskar? A choice of styles for mutual fund investments
As each one of us is at a different life stage and have different financial profiles and goals, our investment portfolios and strategies would also vary accordingly
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It is quite surprising that it has taken so long for the average Indian investor to adopt mutual funds (MFs) as a dependable avenue of investment. I state this based on the fact that the concept of MFs matches many concepts that the conventional Indian mindset is already familiar with. For example, parallels can be drawn from certain features such as unity in diversity (diversification across asset classes in MFs); place complete trust in a person or leader with credibility (professional fund management by asset management companies); and most importantly, the urge to participate in a growth story, but slowly and gradually with measured risks (using systematic investment plans, SIPs, as an investment mode).
With increased awareness about MFs among retail investors, and with a hope that things could again start looking upwards in the capital markets, this financial year could offer decent opportunities for new as well as existing investors to either commence or enhance their investment MF portfolios.
As a matter of fact, leave aside panicking in these volatile market conditions, most of our ‘seasoned’ clients are asking us in this gloomy scenario if they can add further amounts to their ongoing SIPs? This surely shows the increased confidence in MFs as a dependable avenue, and the coming of age of the Indian retail investor.
However, from a financial planning perspective, we know that as each one of us is at a different life stage and have different financial profiles and goals, it is obvious that our investment portfolios and strategies would also vary accordingly.
Let’s understand this by drawing an analogy by keeping MFs as the core component of an investment portfolio with something that resonates easily among most of us—cricket.
We take profiles of three individuals at various stages in their lives to draw similarities with playing profiles of three of our iconic cricketing idols—Virender Sehwag, Rahul Dravid and Sunil Gavaskar.
Sehwag: aggressive base
This is an aggressive portfolio, ideal for youngsters in their mid-20s and 30s. True to Sehwag’s nature of being an aggressive opener from the very beginning, taking risks was second nature to him. He has scored two triple hundreds, which is testimony to the fact that you can succeed with this attitude if you have a long-term view in mind. This investment portfolio will reap rich rewards for those who are in it for the long haul.
Risk-taking at a younger age is advisable as goals are some distance away and liabilities are minimal. Equity-based mutual funds would be the key component of this portfolio. Risk and volatility would mitigate over a longer time frame. Aggression built on fundamentals forms the base of this portfolio, but keep away from speculation and “tips".
As this is a new beginning for the investor, the SIP route should be preferred. In the equity funds component, tax-saving funds (equity-linked savings schemes, or ELSS) should also be included. If salaried, it is presumed that provident fund contributions are ongoing, but is not considered in this portfolio allocation.
A possible composition is given here:
Dravid: balanced core
This mature and balanced portfolio is ideal for those in their 40s and 50s. Rahul Dravid was known for his impregnable defence, patience, focus and flexibility, which formed the corner stone of the team’s batting middle order.
This is the mid-stage in an individual’s life cycle when responsibilities and earnings are probably at a peak. Professional and personal goals need to be balanced. A fine line has to be drawn between being extra conservative and reducing future growth potential or being extra aggressive and risking the conservative scenario. This calls for a mature investment portfolio built on strong fundamentals and solid defence, but with the flexibility to be partly aggressive to sustain growth and generate alpha in the long term. A prudent mix of equity, hybrid and fixed income funds would have to form a major portion of this portfolio.
A blend of SIP and systematic transfer plan (STP) from debt-based to equity funds strategy can be adopted as per the prevailing situation of the investor. Opt for only open-ended funds. Tax savings should be planned according to needs and financial goals. Focus on financial goals and investment discipline to be at its highest level. There is no room for complacency at this stage. Be sure to keep insurance and investment portfolios completely separate.
Gavaskar: safety first
This is ideal for retired individuals (60 years or older).
Sunil Gavaskar, a legend in his own right who had a lot of patience, believed in accumulating slowly and steadily with strong fundamentals in place. Always conservative, but with changing times found that to survive, you need to add moderate risk and aggression in your game.
Though this portfolio would ideally consist of fixed income investments that protect and preserve capital, it also needs a small element of equity funds to beat inflation over a period of time.
To keep the ‘accumulation’ intact (i.e., have a regular flow of income after retirement) and not let taxes eat into a major portion of the retired individual’s corpus, tax-free dividend from mutual funds or interest payout option from fixed deposits and bonds should be preferred.
Make sure that any bank fixed deposits chosen have an interest pay-out mode. Similarly, MF investments, in debt or equity, should have either SWP or dividend pay-out mode. This is so that regular income can be generated.
Apart from the above, asset allocation must be maintained and monitored regularly.
(Sachin Tendulkar is not part of this analogy as God does not have a portfolio.)
Founder, Full Circle Financial Planners & Advisors
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