Equity instruments are undoubtedly the most hyped instruments to get higher returns in today`s age. It’s not that equity investments don’t give returns. Equity portfolio definitely gives returns but not up to the expectations of investors. Patience is another criterion which most people lack when it comes to investing in equity instruments. Ask an investor and he/she would be happy to lock his investments in PPF for the next 15 years. Ask the same investor to invest in equity instruments and the question would be – How much returns would I get?
To win the race of gaining higher returns, people start accumulating a large number of mutual funds. Trust me, I’ve seen many so-called DIY investors. And 90% of them have invested in more than 15 schemes in equity mutual funds. What’s the basis of investing in a higher number of schemes – 3 months/6 months/1-year returns, 5-star ratings on different portals etc., there’re are countless reasons. These DIY investors often end up going to financial planners to curtail the total number of schemes they have. It’s so because they themselves don’t know how to handle so many schemes at the same time.
Then there’s this another set of people who invest in PMS because they aren’t satisfied with equity mutual funds returns. They want more, more and more returns. In this process of seeking higher returns, these people come out of these PMS mostly after incurring huge losses.
If you’ve already invested in tens of different mutual funds schemes thinking yourself to be a DIY investor, you’re wrong. Please come out of your wrong notions because you’re not at all a DIY investor. You’re just investing in equity mutual funds. Yes, chances are that you may have earned good returns on your investments but stop calling yourself a DIY investor.
Remember, 3-4 equity mutual funds schemes are enough for your long-term goals if you keep reviewing them every year. And patience is the key. If you don’t have the patience to invest for 10/15/20 years, equity investments are not for you.
Also Read: Creating Debt Portfolio for your investments
Before moving forward, let’s see which are the equity investments that you should not invest in.
It’s very important to do this segregation.
Investments To Avoid In Equity Portfolio
Let’s take a look at the investments you should avoid in your equity portfolio.
Unit Linked Insurance Products (ULIPs)
I just can’t understand how insurance companies could be so gaga over returns on their ULIPs. Trust me, ULIPs returns are nowhere even close to good performing mutual funds. How can the returns be close to equity mutual funds? Especially if there’re charges of around 5%-8% on the premium for the first year and around 2% charges after that. Take note that these charges are in addition to the fund management charges.
So, avoid ULIPs in your equity portfolio.
If you want to lose your wealth in an instant, derivatives are the best option for you. Day trading will slow down the process of losing wealth to some extent. But towards the end, both derivatives and day trading lead to the same destination.
Okay, I’m in no way saying that day traders don’t earn or it’s a bad profession. But it requires a lot of time and skills. Do you have the needed time and skill? Or are you just trying to make some quick bucks? If it’s not your full-time profession, don’t get into this segment.
And Derivatives are a big NO. The reason is that it’s going to affect your health and wealth badly.
I’m not against investing in stocks. Those who know the art of investing in stocks can create a lot more wealth than investing in mutual funds. I mean, you can definitely give quotes and examples of famous personalities like Warren Buffett and Charlie Munger. But can you actually follow their path? I highly doubt it.
If you really want to invest in stocks, learn the art of investing. Don’t purchase a stock just because it’s on a 52-week low or all anchors on business news channels are endorsing it.
You may have got better returns by investing in certain stocks by listening to your friends or media anchors. But accept that it was nothing but sheer luck. And keep it in mind that this luck will not come into play every time.
Avoid stocks if you lack knowledge about stock investing and most importantly, time to analyze the stocks you want to invest in.
Equity Mutual Funds
Why should I not invest in equity mutual funds? Okay, there’s a particular set of people who should not invest in equity mutual funds. I’ve seen a lot of clients who had never invested in equity mutual funds. But all of a sudden, they want to invest in equity instruments. These types of people are either retired or are nearing retirement. And why do these people want to invest in equity instruments? The reason is very simple – they don’t have enough retirement corpus and want to fill the gap by investing in equity instruments assuming high returns.
So, if you’re retired or nearing retirement and have never invested in equity mutual funds, don’t do it now. The better option would be to reduce retirement expenses. Equity investments are not to fill in the gap in your retirement expenses.
Creating Equity Portfolio
So, what are my options? See if you’re already investing in stocks (being a pro at it), you wouldn’t have read this article till here. Hence, the only option left is equity mutual funds.
Now the question is how to select the ideal number of schemes and how to invest – lumpsum/SIP? If SIP, should it be manual or automated?
So, I asked Mr. Melvin Joseph (Finvin Financial Planners) how he created wealth? Though I’ve been working with him as a paraplanner for the last 2 years, I had never heard his story.
Here is what he said
I have seen many people talking against SIP. For a typical salaried person, SIP in the first week of the month is the only way to create wealth. If he/she waits for the lowest NAV day of the month, the chances are that he/she will simply spend it. During my working life, I never had the luxury of watching the market daily and look for the lowest NAV days.
If you can invest in a mix of equity and debt funds through monthly SIP, you may not be the Top investor, but you can reach your goals comfortably. You can make it complex and write n number of articles on it. But in SIP mode, the client will have a peaceful life, he/she may have to spend just 1 hour twice in a year for review and rebalancing. No need to spend 2 hours daily in chasing the returns. And I have created my wealth the same way.
You May Ask A Question Here – Why Not Lumpsum And Why SIP?
There’s no harm in investing a lump sum if you’re investing in equity mutual funds for the long-term. But you must understand the risk in case the markets suddenly come down. You know that the markets will ultimately recover but most investors fail to understand this.
Let me take an example of a person who’s investing 10,000 per month through SIPs for the last 2-3 years. And his portfolio is showing returns of around 10% till February 2020. Now the person got a lump sum amount of 2 Lakhs from his parents and invested it in the market. Fast forward one month and the markets are down by 35%. Would the investor be able to digest the fall? Maybe or maybe not?
Maybe because the investor has patience and knew very well that investing in equity instruments could have such consequences. Or Maybe not because the investor has never seen such a crash in the market before. This happens with most people, to be honest. As long as the returns show 0% or negative 1%-2%, investors remain patient. But when there’s a sudden jerk in markets and the portfolios are down by 10/15/20%, people get scared. Leave lump sum, people altogether stop investing in SIPs instead of increasing the SIPs.
How to select the equity mutual funds schemes?
First, you must decide how much amount you want to invest in equity mutual funds as per your asset allocation. Suppose, you want to invest an amount of 40,000 per month in equity mutual funds.
You can invest in 4 funds – 1. One Large Cap Fund 2. Two Multicap Funds and 3. One Mid Cap Fund
Large Cap Fund – 10,000
Multicap Funds – 20,000
Mid Cap Fund – 10,000
(Please don’t ask me the name, you can research on your own.)
You can also select one international fund i.e. you can reduce 1 multicap fund from the above and add 1 international funds to have global exposure.
Mid-Cap funds should be selected for a goal that is at least 15 years away. Because if the market falls, mid-cap and small-cap funds are usually the first to fall. And normally, the fall is higher as compared to large-cap funds. Also, the recovery takes time as large-cap funds are usually the first to recover.
Multicap funds because the fund manager can invest in mid-cap as well as small-caps. These help you get much higher returns than large-caps.
Though large-cap mutual funds give lesser returns than mid-cap and Multicap funds in a normal scenario, they’re safer. So, 4 funds are all you need to define your equity portfolio.
But you’ve to remember that the review is very necessary to check how the fund is performing. Remember the days when people were blindly investing in HDFC Top 100/200, ICICI Pru Value Research fund etc. Now, nobody even discuss these funds.
If you don’t want to get into the research part of it, invest in Index Funds and Nifty Next 50.
So, this was all about creating an equity portfolio for your investments.
Don’t stop your SIPs.
Keep Investing and Stay safe.