Factors To Consider When Trying To Create Wealth

Mutual fund investment perhaps, is the best way for passive investors to generate wealth. The right way to do this is to select a fund or a portfolio of funds, which suits one’s investment thesis and risk appetite. To get optimal returns from mutual fund investment, it is important to stay invested with a long term view. However, just staying invested in a particular fund for a long time is not the only pre-requisite. Investors have to periodically review the performance of their mutual fund portfolios, not just to keep track of the returns, but also to analyse the performance of individual funds in a portfolio. The wide divergence of returns between the top performers and the laggards, especially among equity schemes has made it critical for investors to review their holdings more frequently, especially in times where the market remains more volatile.

For example, in the last one year, the best performing fund in large cap space – Axis Bluechip Fund (Growth) delivered 20.84 per cent returns, whereas JM Large Cap Fund (Growth) returned 5.07 per cent, a gap of almost 16 per cent. For the same period, in the multi cap fund category, DSP Equity Fund has delivered 19.73 per cent, while Nippon India Capital Builder Fund IV - Series C has a negative return of 12.21 per cent, creating a gap of around 32 per cent between them.

The small-cap fund categories have seen a wider divergence in performance during the last three years. Axis Small Cap Fund (Growth) returned 21.88 per cent during the last one year, while Quant Small Cap (Growth) had a negative return of 22.22 percent for the same period, creating a wide gap of 44 per cent between the two. Over a three-year period, the gap in returns between the top performer and the top laggard is 19.74 per cent, while it is 11.86 per cent for five year period. Annualised return difference of 11.86 per cent over five years can make a huge difference in one’s portfolio therefore periodic review and reshuffling is absolutely necessary to optimise portfolio returns.

In the Indian equity market context, last two years have been extremely difficult for the mid and small cap space. Therefore, mutual funds focussed on this space have largely underperformed. In addition, although the market has scaled new peaks but the rally has been limited to select large cap names and its thinly distributed, consequently mutual funds which had adequate exposure to these select stocks have outperformed. The Indian equity market is going through a churn; certain sectors such as real-estate, auto, PSU Banks, NBFC, telecom, entertainment which were once the darlings of the investors have fallen out of favor and have in-fact lost a lot of value for their investors. Funds which were overweight on the sectors that are struggling today have lost value for their investors; on the other hand funds that quickly churned out of these sectors have been able to generate decent returns

It is therefore important to adjust one’s investment thesis based on market reality, sectors or stocks which have seen material deterioration in fundamental and have witnessed structural changes should be phased out from one’s portfolio. Investors may not be able to identify the best performing funds every year but consistent underperformance is a red flag. If the underperformance of a fund compared to its peers in the same category is large and continues for more than three years, investors should understand the reasons and should not hesitate to switch to a better performing fund within the same category or to another category that is doing better in the ongoing market conditions

Finally, to generate wealth, it is important to stay invested in the market but this does not necessarily means that one should stay invested in the same stock or in the same mutual fund scheme, investors should be nimble enough to spot under-performance and be ready to switch, and they can only do this if they review their investment portfolios periodically. Under normal market conditions a yearly review should be suffice but in volatile markets this review frequency should be once in six months to minimise risk. 

The author is the Director at Wealth Discovery/EZ Wealth