Everyone has financial goals at different stages of life. There should be a proper route map which helps us to get started in achieving the financial goals. However, having a very good financial plan in hand doesn’t fetch us any result, until and unless we are disciplined in implementing the plan. While implementing the plan, one has to ensure that the investment avenue that is selected should be diversified, easily manageable and liquid in nature. Mutual Funds are the one which possess all of these qualities. Mutual Funds diversify the portfolio by investing in securities such as stocks, bonds, money market instruments and similar assets. Monitoring of mutual funds is also easy and mutual funds are liquid in nature. But success of mutual fund as an investment avenue does not end by just investing in them, there are other aspects which have to be considered to make it an effective way to invest.
Let us now analyze the key roles involved with Mutual Funds:
Selection of the Funds:
The primary step before selecting any mutual fund is to identify the objective of the investment and the time period required to fulfill the objective. For example, investments for a long term Financial Goals, like retirement should have more exposure towards equities and less towards debts on the other hand for the short term financial goal, like buying a car, the investments should be more exposed to debt funds. One should also ensure that the funds which are selected should have a good history of returns while the risk involved shouldn’t be very high.
Review & Re-balance of the Portfolio:
Review of the portfolio will help in tracking on where we stand in the progress of achieving the investment objective. Here are some of the reasons we consider this review and rebalancing of the portfolios:
1) Change of lifestyle:
Our lifestyle changes depending on our financial responsibilities which are inevitable. This change in lifestyle will have an impact on the investments that we made. For example, post marriage the short term goals might transform into the long term goals, like after marriage, goals like buying a car is transformed into buying a home. So the investment objective is changed, at this point in time the review and rebalance of the portfolio will help us to achieve our objective in spite of change of our objectives.
2) Change/Loss of Job:
In case of change or loss of job can also impact the investments. For example, we might earn more by accepting a foreign job opportunity, so we have an additional surplus in hand, where we can deploy it in investments. So, this arise a scope for review and rebalance of the portfolio. Similarly, in case of loss of job then the investable surplus would not be the same as before, so there is a serious call for review and rebalance of the portfolio.
3) Under-performing Assets:
Only review of the portfolio will help us in identifying the under-performing assets. So, regular review and re-balancing of the portfolio protect us from getting rid of bad performing assets. The corrective measures can be taken by assessment of the performance and re-balancing it accordingly.
4) Macroeconomic Changes:
Macroeconomic changes can have an impact on the return on investment. For example, an interest rate cut form RBI is a good indicator for a declining inflation which will give equity market a boost, which should be complimented by a change in asset allocation where the equity fund should have high exposure.
5) Portfolio Drift:
Over the time, due to volatility of the market the original allocations towards the portfolio may deviate, which will result in an improper mixture of debts and equities. As this is unlike the mixture as of the inception of investments periodical re-balancing of portfolio would ensure such drifts are well accounted and the portfolio is moved back to original position.
6) If you’re too near to achieve the investment objective:
The closer we move towards achieving the objective of the investment the keener we have to be in reviewing the portfolio. For example, if we are about to reach our goal in a year or less than a year, then amount needed should be shifted to debt funds to secure the principal requirement. This would ensure that the gains made are not affected by the market volatility.
It is ideal to choose open ended mutual funds as it is easy for the investor to change, switch or redeem the funds. Before we opt for any mutual fund, one should also be aware of the exit load for the mutual fund. Generally, most of the mutual funds have an exit load if the investments are redeemed within one year. Apart from this the other aspect that we need to keep in mind before redeeming is the Tax implications on the mutual funds. The process of redemption is simple, where one have to submit the redemption form to the respective AMC’s (Asset Management Company) who manages their assets and if there is no lock in period then the redemption process happens without any penalties or liabilities on us.
Mutual Funds can be easily monitored and re-balanced according to our objective. It is important to review and rebalance portfolios periodically to achieve the maximum returns on investments. Today, the investors are smart as they do research themselves with the help of technology. However, there is still a possibility that we might miss the target by not being vigilant on the investments. So, do not ignore the financial professional help while taking most valuable decisions of the life.