Mutual Funds Investment Strategy = Help please!

[life2007]

Hello Fellow Investors!

Before anything else, let me clarify that my goal of investing in MFs is basically capital appreciation and retirement plans with is atleast 15 years away. Ofcourse, this can change in case of unforseen emergency or event!

I am still not getting how to deal with Mutual Funds Investments. Some people say book profits periodically while others advise stay invested atleast for 5 years. I am just confused.

I shall give you a live example. I started investing in Jan 2008 and was wise enough to continue my SIPs even when the market crashed and reached 8K levels. In the process, when the sensex reached 17K level, I withdrew an amount equivalent to profits earned. i.e is my investment was 1 lac and I reached 1.2 lac when sensex was 17K. So I redeemped 20K and kept my principal amount of 1 lac intact in the existing MFs. ( I hope this is what booking profits means

First I do not know if I am thinking right by doing the above. Secondly, the main purpose of writing this to you is now what? I mean I dont require 20K now, should I pump back to MFs again, should I wait or should I choose to put this 20K in safer avenues like PPF or FDs. Just want to get the strategy right.

Now, What I fail to understand, when people advise to stay invested for long term, markets keep crashing and coming up. When do we actually realise our gains then.

Please help me to clear this air of confusion. With lot of reading in the internet, one thing is for sure, some risk has to be taken to beat the inflation, I would never put money directly in stocks since I lack both expertise and financial capability to play with my hard earned money. So my only route is to invest in a lesser risk route through MFs, so please I need to know how should I handle it.

Thanks again

Regards

Jeet

 

[rajeshn2007]

Hi Jeet,
I think, you have already started one thread like this before and I hope you have got answers for them

 

[life2007]

Rajesh!

Yes you are right that i started a similar topic before, but you are not right that I got my answers Only 2 people responded and both contradicting each other. Lot of experts start telling other things like what you need money for, your goal, different people have different mindsets.... i have read that umpteen times.. what I am interested to know is the practical method most sucessful people have followed. It still remains illogical to me that you continue investing and investing till the end of pre-decided term. And booking profits seems not to be the solution either.. because we cant predict the track of the markets.. so I am in look out for that one brainy head to solve my query.. could it be you?

Probably i thought I messed up with my earlier query and wrote long long blah blah.. so I chose to start this one... Now I await some concrete answer...

Thanks

Jeet

Hi Jeet,
I think, you have already started one thread like this before and I hope you have got answers for them

 

[tobby]

Hi members

I completly agree with Jeet and its a very genuine question for new comers like us, I am also in a situation like Jeet.

I invested in SIP in the early of this year and last year after crash and seeing a good growth of my investment, though it was a small principal but still.

Please do help us to crack this tough nut.

Tobby

 

[lonsharim]

Jeet,

The answer to your question totally depends on you. Others will only give their opinion based on their perspective. An individual perspective is very important when you invest money in stocks and mutual funds.

Here are some questions you should ask your self.
1. How long do you plan to remain invested.
You mentioned 15 years as a long term goal. That's great but that doesn't explain why you liquidated 20k. It might be OK to skim off the extras from your current portfolio but for a 15 year plan the money must go back in some shape or form, i.e. another fund or form of investment existing in your portfolio or new.

2. How much of a risk appetite do you really have?
In a 15 year period, you will witness a fair amount of upheaval. Weather by design or good fortune, you have already made one wise decision, i.e to continue with your SIP when the markets were down and the NAVs were low. This is something you must always follow and it comes from discipline. The low periods compensate and balance for the times when you buy at higher valuation. Most people don't understand and stop their SIPs when the markets are down.

3. How should you manage risks?
If your 15 years start from now, it can be assumed that you are willing to take more risks now then you would after 12 or 14 years. People will higher risk appetites for instance tend to be heavy on equity based funds and stocks in the initial phases and gradually as the years pass and they reach closer to their goal, they start moving their investments into safer avenues such as debt investments and fixed deposits etc.
As an example
1 to 5 years - Stay invested in equity funds completely.
5 to 8 years - Move 25% of your wealth into debt investments.
8 - 12 years - 50% of your investment now in low risk low return investments.
12 - 15 years - 80% of your investment in low risk investments.

Do you understand now why it is important for you to determine how much risk you are willing to take. If you were very aggressive you could have more invested in equity for longer, and if you were more cautious you could move your wealth into debt quicker. Ultimately that decision is yours alone and should not be based on other people's opinions. Your circumstances are unique to you.

This is already a long mail and I suggest you do further homework on understanding concepts such as Portfolio re-balancing, investment goals, over diversification (the effects of investing in too many funds) and so on.

I hope this helps you determine the path you need to take.

Cheers
MS

 

[life2007]

Hello lonsharim (MS)!

Brilliant response, thanks a ton. After reading your answers several times, atleast I know that you understood what the nature of my query was. Your other guidelines are great.

OK, I got your point of individual perspective. I have seperated 3 things as major investment avenues. I am 36 and the importance of financial planning dawned me this late, but still i believe i can catch up somewhere. By luck, my earlier small invested money was utilised for building my own house. So it is not actually disaster

Now, I always have a future vision by nature. I look forward to have steady income at 60 when my body starts complaining. My finances or career are not in good shape and more importantly not steady.. sometimes it is high sometimes very low. Fortunately, I live a simple contented life and have very less liabilities as of now.

The 3 selected avenues of investing are 1) PPF 2) FDs/NSC/KVP etc & 3) MFs. While I am trying to maintain a balance between these three, my whole idea of investing in MFsis basically with the goal of capital appreciation so that I adjust inflation after 12-15 years and have steady income. Ofcourse, for any unforseen emergency expenditure, this plan will go down the drain.

From your below comments, Risk is something related to time. Let me hope everything goes as per plan, so I can take fair amount of Risk since I need money only after 10-12 years. Now, why i liquidated 20K, because after reading so much, I thought I should be wise to withdraw the profit amount . Now I dont know what to do, I am sitting on it.. and some money is leaking out :lol:. May be I should have switched to a debt fund than redeemping it. Now I will learn something more about debt funds.

Hope you got my point... Here is the short summary!

3 types of investment :

1) PPF = 15 years period. Ultra safe
2) FDs/KVP/NSC = 5 years approx, Ultra safe again. But shorter period, so choice of withdrawing or reinvesting according to situation
3) MFs = 12-15 years. Risk but to catch up with inflation.

So at the end of 15 years, you see i am trying to accumulate from all fronts and see what best can be done!

Also, 4) I am surrendring 2 endowment policy and taking term insurance. 5) Going to take Mediclaim shortly after all the above adjustments.

I know it is further long writing, but I am sure new beginners will also learn too from this.

Now PLEASE OFFER YOUR VALUABLE COMMENTS. OTHER EXPERTS ALSO, PLEASE JOIN. THANKS

Jeet

Jeet,

The answer to your question totally depends on you. Others will only give their opinion based on their perspective. An individual perspective is very important when you invest money in stocks and mutual funds.

Here are some questions you should ask your self.
1. How long do you plan to remain invested.
You mentioned 15 years as a long term goal. That's great but that doesn't explain why you liquidated 20k. It might be OK to skim off the extras from your current portfolio but for a 15 year plan the money must go back in some shape or form, i.e. another fund or form of investment existing in your portfolio or new.

2. How much of a risk appetite do you really have?
In a 15 year period, you will witness a fair amount of upheaval. Weather by design or good fortune, you have already made one wise decision, i.e to continue with your SIP when the markets were down and the NAVs were low. This is something you must always follow and it comes from discipline. The low periods compensate and balance for the times when you buy at higher valuation. Most people don't understand and stop their SIPs when the markets are down.

3. How should you manage risks?
If your 15 years start from now, it can be assumed that you are willing to take more risks now then you would after 12 or 14 years. People will higher risk appetites for instance tend to be heavy on equity based funds and stocks in the initial phases and gradually as the years pass and they reach closer to their goal, they start moving their investments into safer avenues such as debt investments and fixed deposits etc.
As an example
1 to 5 years - Stay invested in equity funds completely.
5 to 8 years - Move 25% of your wealth into debt investments.
8 - 12 years - 50% of your investment now in low risk low return investments.
12 - 15 years - 80% of your investment in low risk investments.

Do you understand now why it is important for you to determine how much risk you are willing to take. If you were very aggressive you could have more invested in equity for longer, and if you were more cautious you could move your wealth into debt quicker. Ultimately that decision is yours alone and should not be based on other people's opinions. Your circumstances are unique to you.

This is already a long mail and I suggest you do further homework on understanding concepts such as Portfolio re-balancing, investment goals, over diversification (the effects of investing in too many funds) and so on.

I hope this helps you determine the path you need to take.

Cheers
MS

 

[life2007]

And yes.....

So what you say experts out there? With my above long blah blah.... give me your opinion in my case....

Do I continue to invest and turn blind eye of the market happenings if the goal is above 10 years.... OR we need to book profits and re-invest when markets tanks down?

Thanks

jeet

 

[lonsharim]

Jeet,

You have all the ingredients, all you need to do is make a tasty dish out of it. I am not going to do the cooking though

Its never too late to start planning for your retirement. I have started more or less the same time as you and I too am in my 30s.

The different avenues you mentioned are all viable options. PPF for example is great, it has low risk but the downside is that it has less returns as well. Equity as an investment class outperforms all other investment avenues if you have the patience to let your investments stay in for extended periods. You mentioned 5 years, that for me is a bare minimum.

Placing a portion of your investments in FDs etc is also a good idea because you can have access to it if you need it in emergency. But be aware that this will not give you maximum growth. Personally I don't invest too much in either of the two. I contribute a basic minimum to my PF. I don't worry about emergency money either. Should there be emergencies then I am confident I can raise money without effecting my investments. Then again, that's my outlook, yours will be different from mine.

Taking a term insurance is also a smart move because a shrewd investor should never mix his investments and insurance. The cocktail serves the insurance industry more than it serves the investor.

Now that you know the different avenues you are going to invest in, the next step for you is to determine how much you put in each of them. You should go further than that. Based on the regular investments every month, you should determine how much your investments will fetch you at the end of 15 years.

You know how much the FDs, PF etc will grow and you should make a base assumption on equity growth. Say 12% annualised growth. That should be a fair assumption over a period of 15 years. It could be a lot more but that's the basic minimum expectation I have from equity investments. This will give you an approximate expectation at the end of 15 years. If you think its going to be less, then you increase your monthly investments and vice versa.

As the years roll by you should periodically engage in portfolio rebalancing. Some do it once a year, some once in 6 months. Re-evaluate your position regularly. That does not mean you rebalance for the sake of rebalancing.

MS

 

[life2007]

Hi.. Lonsharim

Thanks a ton.. You explained it beautifully the various aspects of investment.

Just the one vital answer to my basic query is still illusive

Let me ask the other way?

Would you keep on investing uninterrupted in Mutual Funds if you have a long term goal of 15 years from now? OR.. You will book profits periodically and re-invest based on market conditions?

[Here we are not discussing the rebalancing or review part]

Thanks

Jeet

Jeet,

You have all the ingredients, all you need to do is make a tasty dish out of it. I am not going to do the cooking though

Its never too late to start planning for your retirement. I have started more or less the same time as you and I too am in my 30s.

The different avenues you mentioned are all viable options. PPF for example is great, it has low risk but the downside is that it has less returns as well. Equity as an investment class outperforms all other investment avenues if you have the patience to let your investments stay in for extended periods. You mentioned 5 years, that for me is a bare minimum.

Placing a portion of your investments in FDs etc is also a good idea because you can have access to it if you need it in emergency. But be aware that this will not give you maximum growth. Personally I don't invest too much in either of the two. I contribute a basic minimum to my PF. I don't worry about emergency money either. Should there be emergencies then I am confident I can raise money without effecting my investments. Then again, that's my outlook, yours will be different from mine.

Taking a term insurance is also a smart move because a shrewd investor should never mix his investments and insurance. The cocktail serves the insurance industry more than it serves the investor.

Now that you know the different avenues you are going to invest in, the next step for you is to determine how much you put in each of them. You should go further than that. Based on the regular investments every month, you should determine how much your investments will fetch you at the end of 15 years.

You know how much the FDs, PF etc will grow and you should make a base assumption on equity growth. Say 12% annualised growth. That should be a fair assumption over a period of 15 years. It could be a lot more but that's the basic minimum expectation I have from equity investments. This will give you an approximate expectation at the end of 15 years. If you think its going to be less, then you increase your monthly investments and vice versa.

As the years roll by you should periodically engage in portfolio rebalancing. Some do it once a year, some once in 6 months. Re-evaluate your position regularly. That does not mean you rebalance for the sake of rebalancing.

MS

 

[AW10]

Just to add 2 cents from my exprience.. Mutual funds are BUY ONLY instuments and works well when market goes north.. but unfortunately, market does go south and at that time it makes sense to book profit.
This additional profit can be reinvested only when we see the sign that market is going up. No point in inveting in MF again when market trend is still down.

This approach of BUY --> Book profit --> hold cash or debt ---> BUY later.. can beat the typical BUY and HOLD approach any day. Important is to define your appraoch to decide on the direction of market, defining structured approach to take action and testing it on historical data. If results are found suitable then implement it else change the approach.

If one can't do that consistently and monitor market on regular basis, then better to leave the money and not book profit. Historically, it is fact that best of the market returns (+ive or -ive) come on hardly 5% of the trading days. And if you are not in the market before those days, then your effective returns will take bit hit.

In my approach, I will ride with the fund manager when days are sunny..but as soon as it starts raining, I will run away with my funds and ditch them.. till the time sun comes out again.

Happy Investing.