Do not judge your investments only on returns

Over last few days, I have got calls from several investors who have shown their concern about the performance of certain schemes in their portfolio. The concerned schemes are non-midcap oriented schemes, be it debt, balanced or large cap funds.

In last one year, mid and small cap funds have delivered extraordinary returns of 60-100%, which can be termed as once-in-5-years kind of phenomenon. These funds have outshone even other equity funds by huge margin. Does that mean that investors should now switch their investments from debt and other equity schemes to midcap funds to maximize returns?

Few important considerations that an investor needs to make before getting impatient with his portfolio are shared below.

1.            You might be holding debt funds to meet your emergency, short or medium term needs. Debt funds provide element of safety and stability to a portfolio. Your expectations from these funds at the time of investment would have been safety, liquidity and low but consistent returns. The debt funds are doing just that and will keep on fulfilling the promise made by them.

You should consider switching your debt investments to equity funds only if your short/medium term requirements envisaged earlier are no longer valid. Still, keep some portion of your investments in debt to meet emergency requirements. Debt investments are not to maximise returns and should be looked from the same perspective.

2.            The equity portion of your portfolio might be having balanced funds which may not be showing as phenomenal returns as midcap funds currently. Balanced funds invest their money in both equity and debt. They are designed to maintain a specific debt:equity allocation over market cycles. This enables them to sell shares when the market gets high and buy shares when the market is low. In this manner, they provide stability to the portfolio and are less volatile than pure equity funds.

 

With markets touching new highs on regular basis, it is prudent to capture the upside and shift a portion of equity profits to debt so that the gains made from earlier investments could be preserved in an eventuality of market fall. Balanced funds do just that automatically and hence, should form core part of your growth portfolio.

3.            Large cap funds invest money in top 100 companies of the country. These companies carry less risk in equity investments as compared to mid or small size companies due to their size and presence in business lasting several market cycles. In extreme bull markets, the large cap fund investing in these companies may show lower returns than mid or small funds but in flat or negative market cycle, these funds tend to outperform mid and small cap funds (Remember period between 2011-2013).

Apart from balanced funds, large cap funds should form a core part of the portfolio as these funds provide stable returns in comparison to mid or small cap funds.

You should consider switching a portion of your large cap fund to a midcap fund only if you currently have no exposure to midcap funds. If you are already holding midcap funds in your portfolio, you should continue to invest in large cap funds for stability and to be a part of top 100 companies of the country.

4.            In every market cycle, one kind of Best Investment Plan shall always outperform all the other kinds. Sometimes equity funds give negative returns and debt funds seem to be quite attractive. In volatile markets, balanced and large cap funds tend to outperform midcap funds. In extreme bull markets, midcap outperforms all other types of investments.

As a seasoned investor you shall know that it is not possible to predict market movements, hence to make optimum and consistent returns, you need to have exposure to different kinds of investments to benefit from all market cycles.

To summarize, rather than focusing on maximizing returns, you should focus on building separate diversified portfolios for your various financial goals. Consult your advisor to create asset allocation and diversification strategies for each goal. This planning for future goals shall not only reduce risk of your entire portfolio but also make sure that each rupee invested by you succeeds in meeting your future requirements as expected. After all, the basic reason behind every investment is to meet a certain goal. Isn’t it?

Happy investing!