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Business News/ Mutual Funds / Keep emergency money ready before investing in any asset class, says Chirag Mehta of Quantum Mutual Fund
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Keep emergency money ready before investing in any asset class, says Chirag Mehta of Quantum Mutual Fund

Investors who lack the time, knowledge, or expertise to construct and manage a diversified investment portfolio on their own may find Multi Asset Allocation funds convenient and effective.

Chirag Mehta, CIO, Quantum Mutual Fund (Quantum Mutual Fund)Premium
Chirag Mehta, CIO, Quantum Mutual Fund (Quantum Mutual Fund)

When it comes to investing, instead of obsessing about news and events outside your control, it’s important to manage what’s in your control, says Chirag Mehta, CIO, Quantum Mutual Fund.

In an interview with MintGenie, Mehta said that before you begin investing in any asset class, you should keep a financial backup or “Emergency Money" ready to see you through 12 months of expenses.

Edited Excerpts:

Internationally, only three Indian companies currently feature in the top 100 companies based on market capitalisation. Do you anticipate an increase in large-cap Indian companies making it to this list? If so, what factors contribute to your belief? 

India is one of the fastest growing major economies and the Indian economy is projected to reach $5 trillion in the next few years. We estimate that India will account for 14% of global GDP by 2050. This will in turn propel domestic businesses. Government capex and reforms have put the economy in an upcycle. At the same time, Chinese companies have been losing market share as the Chinese economy and hence the markets are struggling with the aftereffects of a zero-covid policy and other economic policies. As such it is reasonable to expect more Indian companies to feature in the top 100 global companies list in the future. 

Mutual funds come in various types. How should investors decide to choose from them to strengthen their portfolios?

Mutual funds are meant to simplify the task of investing, especially for those with no time, inclination or expertise to invest directly in the markets.  but with the number of options available these days, choosing the right mutual fund can itself become a confusing, overwhelming task for many. A simple yet effective 12-20-80 asset allocation strategy can be a good way to start.

Before you begin investing in any asset class, you should keep a financial backup or “Emergency Money" ready to see you through 12 months of expenses. Ideally, park this money in a safe instrument with no risk such as a bank savings account or a well-managed Liquid fund. After setting aside 12 months of safe money, whatever money is left could be split between 80% to Equities and 20% to Gold. 

When you look at investing 20% in gold, you should ideally choose efficient forms like the gold fund of funds or gold ETFs. This helps negate any worry about its purity, price, or storage hassles as against physical gold which has pricing markups and locker charges. Finally, one invests 80% in an equity bucket. Equity is an inflation-beating asset class and is ideal for generating wealth in the long term. The equity bucket should ideally be diversified across styles of equity management, market cap segments, and strategies. 

Investors who lack the time, knowledge, or expertise to construct and manage a diversified investment portfolio on their own may find multi-asset allocation funds convenient and effective.

These funds invest in a variety of asset classes, such as equities, fixed income, and gold and provide investors with a diversified portfolio that can help to reduce the risk associated with just investing in a single asset class, generate good risk-adjusted returns, and achieve long-term investment goals. So, as an investor, you get a professional Fund Manager to take care of your asset allocation needs and have the ease of checking only one NAV to know how your investments are faring.

Risk management is crucial in investment. How does Quantum AMC address risk in its mutual fund offerings?

Quantum is disciplined about its processes and investment framework which is an effective risk management tool. Also, Quantum has always prioritized companies with good governance practices as a risk management strategy. Quantum adopted an "Integrity Screen" in 1996. This answers questions like how founders treat minority shareholders, allocate capital and deal with environmental concerns. If a company/Board does not meet our integrity checks, it will not be included in the portfolio, irrespective of how large the company's weight is in the benchmark. More recently, this screening approach has culminated into a comprehensive proprietary scoring model we use for Quantum India ESG Equity Fund.

What advice would you offer to individuals initiating their mutual fund investment journey?

Today’s economic environment is very unpredictable. Thus, when it comes to investing, instead of obsessing about news and events outside your control, it’s important to manage what’s in your control. Managing your lifestyle and maximizing your savings can have the same impact on your net worth as increasing your investment returns. Starting to save even small amounts can make a huge difference to your financial well-being. Start as early as possible and be patient to enjoy the effects of compounding. 

The data shows that many young investors have started investing in the post-Covid era and parked their savings in equities and equity-oriented mutual funds, which is a great start. With the glorious rally that equities have seen over the last couple of years, coupled with the ease of investing and Fear of Missing Out (FOMO), this isn’t surprising. But while domestic equities offer long-term growth potential and warrant the bulk of an investor’s portfolio, they are not infallible. 

Everything from geopolitical tensions, monetary policies, and commodity prices have a bearing on our domestic macros. So, it’s important not to become complacent and concentrate your savings on this one asset class. Some allocation to portfolio diversifiers like gold and fixed income which are imperfectly correlated to equities is ideal. Thus, Multi Asset Allocation funds which invest in equities, fixed income, and gold can be a good starting point for individuals initiating their mutual fund investment journey.

Market timing can be tempting but risky. How can investors stay focused on long-term, disciplined investing rather than attempting to time the market?

Markets are unpredictable and trying to time them can often be counterproductive. It is thus recommended that investors stay disciplined and use a staggered approach to investing to lower their average purchase costs and in turn improve their long-term returns. 

How frequently should investors review their mutual fund holdings, and what factors should influence their decisions regarding portfolio adjustments?

Investors tend to churn their mutual fund portfolio very often trying to chase the best-performing funds. This is not ideal as fund performance goes through cycles and frequent churning is tax inefficient. Portfolio adjustments or exit from markets should ideally be done for the following reasons:

Rebalancing - The asset mix created by an investor based on his investment objective, time horizon, and risk-taking ability inevitably changes as a result of differing returns among various securities and asset classes. As a result, the percentage that you've allocated to different asset classes will change. This change may increase or decrease the risk of your portfolio. To ensure that your portfolio is composed in a manner that adheres to your investment strategy and risk profile, rebalancing is an important practice.

Goal approaching – As and when the goal for which one has invested comes near, one can consider gradually shifting money from the equity/hybrid funds to liquid funds to ensure lower volatility closer to the goal to facilitate withdrawals.

  1. Fund not performing well for an extended time.
  2. Material changes such as a change in the fund’s investment objective or a change in the Fund Manager may be considered as reasons for exiting a fund as its previous track record may not be relevant anymore.

Lastly, are there any common misconceptions or myths about mutual fund investing that you'd like to address for our beginner readers?

There is a common misconception that volatility and risk are the same thing. Volatility refers to the fluctuations in the price of an investment, while risk is the probability of suffering a permanent loss of capital in that investment.

Some investors get too carried away with volatility that they refrain from investing in equity mutual funds altogether after a massive fall. However, equity mutual fund investments are meant for long-term investing. Thus, interim volatility in equity funds shouldn’t perturb you if you are a long-term investor with a horizon of more than seven years. That’s because the probability of a loss in equity funds becomes almost non-existent as the holding period increases. 

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Published: 29 Feb 2024, 02:58 PM IST
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