Why It Is The Best Time To Build A Strategic Mutual Fund Portfolio To SIP Into
Aug 08, 2019

Author: Divya Grover

(Image source: Business photo created by jcomp - www.freepik.com)

If you thought the year 2018 saw one of the worst stock market fluctuations in recent times, the year 2019 is proving to be no better and up until now has failed to offer any respite to investors. Since February 2018, we continue to witness the market crash frequently.

Many micro and macro-economic factors dragged down the gains in 2018. Imposition of capital gain tax on equity investments, standardisation of mutual fund schemes, global trade tensions, rising crude oil prices, depreciating Rupee, rising Bank NPAs were some of the issues plaguing the market.

Graph 1: How have markets fared across time periods

Movement of S&P BSE Sensex - TRI, S&P BSE Mid-cap - TRI and S&P BSE Small-cap - TRI from February 1, 2018 to August 8, 2019
Returns – Absolute
YTD as on August 09, 2019
Source ACE MF


Small and mid-caps were the most affected as many stocks saw huge correction in values. Large-caps fared better during this period.

In the current year 2019, the Sensex reached its all-time high on the pre-election rally and post-election results rally. However, the gains were short lived and the market rally came to an abrupt end after the Union Budget was announced on July 5, 2019.

[Read: Have You Planned A Strategy To Invest In Mutual Funds In 2019?]

The budget imposed higher surcharge on super-rich tax which did not go down well with the foreign portfolio investors. Since then there has been a bloodbath on the Dalal Street as the selloff by FPIs eroded gains worth billions of Rupees from the market.

Graph 2: Markets battered since the announcement of the Budget

Movement of S&P BSE Sensex - TRI, S&P BSE Mid-cap - TRI and S&P BSE Small-cap - TRI from July 5, 2019 to August 8, 2019
Base taken as Rs 10000
Data as on August 09, 2019
(Source: ACE MF)


In these conditions even the large-caps faced the fire. Apart from the selloff by foreign investors, slowdown in economic growth, weak consumption, low corporate earnings growth, liquidity and debt crisis contributed to the market volatility.

The government announced several measures in the Budget, while RBI announced rate cuts in the previous monetary policy meetings to boost economic growth and shore up investments. However, the measures announced may take time to show visible results; and therefore, it may be a while before the economy is back on track and other issues are resolved. Thus, there may be more pain in the offing during the short-term.

Strategy to be adopted

The volatility has many mutual fund investors worried as SIPs of many schemes have been generating negative returns in the past two years. This does not mean you should stop or miss SIP instalments. There is scope to create wealth in the long-term if your portfolio is strategically placed. In fact, systematic investment plan (SIP), which is a strategy in itself, may prove to be rewarding and handle turbulence during volatile times.

During volatile times, investors panic and tend to make hasty decisions that may prove harmful in the long-term to their financial objectives.

[Read: Markets Will Remain Volatile, But Here's How A Strategic Portfolio Comes To the Rescue]

This highlights the importance of building a strategic portfolio based on the `Core & Satellite' approach to investing. The `Core & Satellite' approach is a time-tested investment strategy followed by some of the most successful investors to build a portfolio.

The term `Core' applies to the more stable, long-term holdings of the portfolio, while the term 'Satellite' applies to the strategic portion that would help push up the overall returns of the portfolio, across market conditions. Plus, the 'Satellite' portfolio provides the opportunity to support the 'Core' by taking active calls based on extensive research.

The `Core' part can consist of large-cap fund, multi-cap fund, and value style fund and should form 60% of your portfolio holdings. Whereas, the 'Satellite' part of the portfolio (40% of holdings) should include a mid-cap fund, large & mid-cap fund, and an aggressive hybrid fund.

Weightage of each portfolio constituents in both 'Core' and 'Satellite' categories can make a huge difference in the end and therefore you should carefully assign weights to each category and the schemes for the portfolio.

This strategic portfolio lets you focus on the stable schemes with a long-term view and at the same time capitalise on short-term opportunities. Its unique combination helps you generate superior returns without taking excessive risks.

Here are 6 benefits of 'Core & Satellite' approach:

  • Facilitates optimal diversification

  • Reduces the need for constant churning of your entire portfolio

  • Reduces the risk to your portfolio

  • Enables you to benefit from a variety of investment strategies

  • Aims to create wealth cushioning the downside

  • Offers the potential to outperform the market

How to build a strategic portfolio?

To build a strategic portfolio of mutual funds, here are a few set of rules:

  • The selected mutual fund schemes should be amongst the top scorers in their respective categories. The portfolio should be built with a time horizon of at least five years

  • It should be diversified across investment styles and fund managements

  • Each mutual fund scheme should be true to its investment style and mandate

  • The mutual fund schemes should be managed by experienced and competent fund managers and belong to fund houses that have well-defined investment systems and processes in place

  • Each fund should have seen outperformance over at least three market cycles

  • The portfolio should contain an adequate number of schemes in the right proportion. In short, it should carry the most optimum allocation to each scheme and investment style

  • The number of schemes in your portfolio must be limited to seven

  • Not more than five mutual fund schemes should be managed by the same fund manager

  • Not more than two mutual fund schemes from the same fund house should be included in the portfolio

Editor's note: If you are looking for high rewards with moderate risk, consider PersonalFN's Premium Report, "The Strategic Funds Portfolio For 2025(2019 Edition)".

With this, you gain access to a ready-made portfolio of top recommended equity mutual funds for 2025 based on the Core & Satellite approach to investing.


If you haven't subscribed yet, do it now!



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