Investment has become of the most important financial activities in the modern world. People often invest their hard-earned money to achieve their financial goals. While some people invest heavily to retire early, whereas others invest to ensure they have a comfortable post-retirement life. There are also others who invest to have a substantial amount of savings. Whatever be the reason investment has become essential today more than ever. There are several investment tools available in the market that are being utilised by the different types of investors. The tools that are employed by the investors depend on their financial aspirations and their risk appetite. However, there are certain investment tools which have become more popular than the others.
Portfolio Creation and Need for Management
Mutual fund investment has fast become one of the most frequently used investment tools for the modern generation. Be it investing through Systematic Investment Plans or lump sum investments; there are plenty of takers for mutual fund investments. When it comes to mutual fund investments, it is a well-known fact that building a diverse and stable portfolio is essential. It is imperative that an investor has a clear idea about his or her financial aspirations and build a portfolio accordingly. Majority of the new investors take assistance from experts from Asset Management Companies or individual advisors. However, seldom the investors realise, that creating a mutual fund portfolio is only half the job done. To enjoy long-term success in the market, it is important not only to create a portfolio but also to manage it effectively.
Most of the inexperienced investors have very little idea as to how to manage a mutual fund investment portfolio to avoid risk and increase returns. In reality, the answer to this is not very difficult to find. In fact, there are plenty of options to choose from, depending on various aspects of the investments. Let us discuss four strategies that you should consider when deciding how to go about managing your mutual fund portfolio –
- The Wing It Strategy
Let us start with the most common and the least effective of the portfolio management strategies at this present moment. The wing it strategy when simply described is a strategy that lacks a proper strategy. Any portfolio which lacks a proper structure or a plan can be classified under the wing it strategy. Investors who employ this strategy typically is always on the lookout for new investment options, most probably because they are not satisfied with the present investments. These investors more often than not do not have a set plan to decide what to invest in and what to avoid strictly. This can be extremely confusing and, in most cases, rather unsuccessful. Therefore, experts strongly suggest the investors avoid this strategy and have a more stable set up for decision-making, as that makes adding money to the portfolio a much more straightforward a task.
- Market-Timing Strategy
This is a strategy which sounds extremely impressive but is rather difficult to implement. The market-timing strategy has been a part of portfolio management for decades and yet, there are very few who can claim to have mastered it. The market-timing strategy can be described as a strategy where the investor develops the sense where they get in and out of the assets, sectors or market at precisely the right time. The aim of the investor here is always to buy low and sell high. Unfortunately, the success rate of this among the investors is quite low. One of the main reasons for this is believed to be that investors’ behaviour is usually dominated by emotions and not logic. As a result, many investors due to their behavioural mistakes end up buying high and selling low, thus suffering a loss. Due to this, there is a growing sense among the investors that this strategy does not work as no one can consistently predict the market successfully. However, a certain level of success can be achieved with this strategy if the investor manages to study the various market-timing indicators carefully and make decisions on the basis of that.
- Buy and Hold Strategy
This is the most widely used and the more frequently advised mutual fund portfolio management strategy. In addition to the aforementioned factors, another factor contributing to its widespread adoption is that it is extremely easy to implement. From a statistical point of view, utilising this strategy makes sense because the 3/4th number of times the market goes up, whereas only 1/4th number of times it falls. Hence, if an investor employs the buy and hold strategy, and weathers the various rise and falls of the market, then the odds are in the investor’s favour. Therefore, it is often the go-to option for a number of investors in India and the rest of the world.
- Performance-Weighting Strategy
The performance weighting strategy is perhaps the most difficult strategy to adopt for new investors. This is because this strategy is based on the theory that the market performs in cycles. This type of strategy is considered to be somewhere in between the market-timing strategy and the buy and hold strategy. Here the investor is required to review the performance of the investments on a regular basis and make changes to the portfolio to optimise performance.
For example, if at the beginning of the year an investor has invested equally in four portfolios and at the end of the year, he or she finds out that out of them L&T mutual fund has outperformed every other portfolio, whereas X&Y mutual fund was the least performing portfolio. Typically, the first reaction of most investors would be to exclude X&Y mutual funds, buy more of L&T mutual fund. However, as per the performance-weighting strategy, the opposite must be done. i.e., sell the L&T funds and buy more of X&Y funds. Although it is very difficult for investors to do this, it has historically proved to be fruitful because the investment market is cyclical in nature.
While some of the above-mentioned strategies are more popular than the others, the investor himself or herself has to make the decision based on what is most suitable and what is most realistic from his or her position. The most crucial thing that has to be kept in mind after a strategy has been finalised is following it as strictly as possible. This is because those investors who enjoy the best results are not those who have a fantastic plan, but those who have a plan in place and are prepared to follow through with it no matter what.