Is your mutual fund portfolio a suitable one?  Did you ever think about it, in the adrenalin-induced rush to chase past performances and the star ratings?  If investing in mutual funds is all about investing in a 5-star rated scheme, where the star rating represents the past performance and doesn’t say anything about the future, is your investing method a ‘suitable’ one?

Prokens Opesmetrics have worked with our clients for several years to build and maintain a ‘suitable’ mutual fund portfolio matching an investor’s risk tolerance, time horizon and investment objectives. The mutual fund portfolio is reviewed holistically at regular intervals, usually once a year.  Many clients have adopted this process to calibrate their mutual fund portfolios. Today, they are the beneficiaries of foresight. They have:

1. Given their mutual fund portfolio significant downside protection, and
2. Created an opportunity for themselves to buy at the lows.

Psychologically, when they find that their portfolio is a ‘suitable’ one matching their willingness and ability to take a particular level of investment risk and accordingly choose the asset allocation, they are better off as the upside potential looks better because they have kept the powder dry inside their portfolio. Otherwise, it would have meant they should bring in fresh investments to restore the balance. They are buyers in a market which has seen a significant correction.

One of the banes of a household (aka retail) investor is the inversion of investment philosophy. A typical household investor decides to:

1. Invest in capital market instruments such as mutual funds when euphoria is at or nearer to the peak, and
2. Exit at the historical lows when pessimism rules the roost.

Thereby, a household investor ensures that a scheme’s long-term return is often higher than her mutual fund return since inception.

Academicians and seasoned investors say you should do quite the opposite. You should invest when valuations are cheap (when a recession or some other systemic risk is on) and book profits nearer to the point of exuberance.

It is easier said than done because we humans are helots of our emotions. Often, fear or greed will derail our decision-making processes. The best tools to overcome our emotional biases are measuring risk tolerance and sticking to asset allocation. Such a process is generally available to only exceptionally large or institutional investors. However, we at Prokens Opesmetrics have made it our mission to bring cutting-edge processes that meet MFD regulatory requirements at a higher level to all our investors. You can join the hundreds of individuals and their families. Contact us here.

Image courtesy: By Mettle30 - Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=120482182