Move with the times, bet on recovery
An investor would do well by learning from the past and avoid mistakes that have earlier affected wealth creation
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We head into FY2017-18 with several equity funds, if not most, near their all-time high net asset values (NAVs) and best performances. Some of the equity funds will show vastly superior performance over others though all funds have done well. In such a situation, the markets always show a tendency to channel money flows into the outperformers rather than adopt a basket approach. While the markets seem to follow this rather predictable and set approach, an investor would do well to learn from the past and avoid mistakes that have earlier affected wealth creation.
First, it is important to remember that valuations are hardly cheap in the performing funds of 2016-17. Their valuations are steep, and one runs the risk of owning a richly valued portfolio. Such a portfolio could see long periods of time-corrections and no returns. Stocks tend to advance returns when they run up too fast and funds owning such stocks tend to lag for years after periods of exceptional performance. So, even doing a systematic investment plan (SIP) in the best-performing fund of the past year may not really work if it is a niche fund like in the micro-cap, small-cap or sectoral category.
Broadly, an investor has to focus on four decisions—what should be my asset allocation in 2017, what should be my SIP strategy, how to handle legacy portfolios, and what should be my strategy to align my portfolio to the economic recovery post-demonetization and Goods and Services Tax (GST).
SIPs are best allocated to large-cap, diversified and balanced funds, in that order. Though these funds have not really performed greatly in the recent years, they are still likely to reap the most benefits of an economic recovery.
Investors must remember that when the macro numbers start improving, these funds move very quickly and give very little time to react. The SIP will keep deploying money steadily and this should work in the investor’s favour in an improving economy. Therefore, one must choose the SIP fund based on long-term performance, the fund manager’s reputation and consistency of track record. Near-term performance should not deter you from choosing a stellar long-term performer.
A superior fund will always make up lost ground quickly and one can never get in just when it happens. The only way to own a great fund is to show continuous faith in it and to retain the faith through good and bad times.
Every investor should enter FY2017-18 carrying a legacy portfolio. The important thing is to ensure that this portfolio has the right asset allocation to succeed in the new financial year. Importantly, this year could see performance change dramatically from FY2016-17. The winners of this financial year could be different from winners of the previous one.
Investors must ensure they allocate enough capital to tomorrow’s winners, where they aren’t adequately invested. If a portfolio is over-exposed to performing funds of FY2016-17, an investor needs to judiciously rebalance her portfolio by booking profits in some of these funds. Move long-term profits into more stable, stellar long-term performers.
Investors find this difficult to do. Nobody wants to get off a winning fund even if it is grossly overvalued. But one should remember that not all categories of funds are permanent holds. This is especially true for sectoral or category funds. The implementation of GST and rapid remonetization of the economy will surely improve the country’s macros and bring back headline growth. This will lead to the gradual revival of the economy in FY2017-18 and beyond.
Investors must ensure that they are adequately invested into front line cyclical, that they are ready to bet on a revival in large-caps, and are maintaining the right asset allocation. Rising interest rates in the US economy would affect gold prices and one would be better off investing in short-term debt funds rather than in gold. Betting on the recovery is important. The defensive trade in smaller businesses is more or less over. Investors must realize the importance of making the shift in time.
Shyam Sekhar is chief ideator at ithought