CHOOSE WISELY: Investors must also look at past returns, risk ratios, turnover, size, background, charges
Any investor looking to create a long-term portfolio aiming to achieve defined goals is faced with the first question around risk and return profile. There are many frameworks used by advisors ranging from basic ones like 100 minus age for equity allocation to complex risk profilers and questionnaires using concepts of psychometrics and behavioural finance to arrive at investors' risk profile. Almost all advisors use this profile/questionnaire along with tenor, age, family background, goals, etc, to arrive at an ideal portfolio asset allocation. This asset allocation broadly defines mix of assets, that is, equities, debt and alternate investments in a portfolio.
The next question after fixing the asset allocation is on how to build an ideal equity portfolio. There are many questions which typically comes to mind – How many investment schemes should the equity portfolio be split into? Should one choose active Funds or ETFs? How should one deploy monies in equities – lumpsum or staggered? Should one consider PMS/AIF? Can a part be invested directly in stocks? How should one evaluate and select fund manager?
A well-balanced strategy for equity portfolio should have diversification at broadly four levels – Fund Manager, Asset Management Company (AMC), Strategy and Style.
While quantitative factors like past returns, risk ratios, turnover, size, vintage and charges/fees are some common factors considered by any investor and readily available for evaluation, the objective of this article is to highlight a few qualitative considerations in selecting a fund manager/AMC and how to adequately diversify equity portfolio by choosing from complimentary styles and strategies.
AMC evaluation - The key parameters to be considered are vintage, Assets Under Management, distributor network, promoters/key management personnel with ownership pattern, key man risk, past/present complaints/litigation and market feedback, etc. Investment approval process (IC, decision making), risk monitoring parameters, stop loss policy, review process are some of the other important factors.
Fund manager evaluation - Number of years in managing investors funds, along with experience of a few bull and bear market cycles are paramount. Track record of current and past funds, any major mishaps, number of years at current job and alignment of interest and skin-in the game shown by fund manager investing their personal savings in the same funds are other parameters worth considering.
Investment strategy and style are other two dimensions around which diversification should be achieved. Market capitalisation, growth v/s value, top-down v/s bottom-up style of stock selection, concentrated v/s diversified portfolio, fundamental v/s technical v/s algorithmic/quant-based strategy, long-term hold (low churn) v/s tactical and opportunistic positions are some of the different style dimensions to be mixed together to create meaningfully diversified portfolio.
Lastly, there are broadly three formats or vehicles for equity investments currently available like, Mutual Funds, Portfolio Management Services and Alternative Investment Funds (not including Ulips/NPS/Retiral Structures). They differ on some parameters like minimum size of investments but as underlying investments in each of these are equities only, each of these can evaluated on the above-mentioned points to include them in the portfolio irrespective of their structure.
Restrictions or 'no-go' list
A few restrictions or "no-go" list will also serve as a handy reckoner to avoid typical pitfalls in constructing an equity portfolio. These must include:
Resist temptation to directly invest in shares based on tips, company announcements or broad recommendation of friends, TV anchors or business dailies – Any investor who cannot do research on companies and follow developments in business, industry etc himself is better off by entrusting professional fund manager for equity management
Avoid derivatives – as rightly said, even one accident in this can lead to permanent loss of capital
Stay away from "seasonal themes" or fads which come in vogue and attracts attention only after good short-term performance. If there is merit in such themes trust your chosen fund manager to participate in the same through the funds
Restrict allocation to long tenor close-ended funds or structures
Based on the broad guidelines suggested above, selection of 10-12 schemes managed by six to eight fund managers/AMCs can lead to a well balanced and adequately diversified long term equity portfolio well-structured to achieve long term goals.
The author is managing partner & head - family office of ASK Wealth Advisors. The views and opinions expressed in this article are personal
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
 "Investors")
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
)
){kind=small}
){kind=small}
)
)
)
)
)
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}