SUMMARY – Right methodology, goal based investment and your commitment is a key to a successful investing in Equity MFs. Here are the key considerations:
1. Align investment to your goals
2. Ascertain Capacity to take Risks
3. Design your MF portfolio
4. Identify top performing MFs
5. Invest through SIPs & withdraw through SWPs
6. Keep a regular check on your MF portfolio
7. Hire an expert
8. Manage logistics

Here is the methodology that we suggest.

1. Align investment to your goals: Decide the objective and duration of your investment. The Equity MFs are suitable only for a long term period i.e. 5 years or more. Goal based investment is one of the best way of building a portfolio.
2. Ascertain Capacity to take Risks: Equity investments come with market risks. You should not invest in Equity if you are not comfortable with fluctuations and possibility of losing capital especially in the short term. You can use Risk Assessment tools on internet. You can decide exposure to Equity based on your age, risk profile & goal requirements.
3. Design your MF portfolio: We normally recommend actively managed Large Cap Equity MFs & based on your risk appetite, you can also invest in Mid & Small Cap MFs. Additionally, consider taking an exposure on specific sectors up to 10% of your MF portfolio. Ideally, you should not invest in more than 4-5 MFs. Some experts prefer passively managed funds given their lower cost structure & market linked returns.
4. Identify top performing MFs: Check www.valuereserachonline.com or www.morningstar.in to research the right schemes for you. Compare rankings on two sites for a second opinion. Your Financial Planner may have paid research tools and better insights. Remember that past performance is not a guarantee of future performance. Try & diversify across AMCs & stick to those AMCs which have a long standing track record.
5. Invest through SIPs & withdraw through SWPs: Leveraging SIPs (Systematic Investment Plans) is a core to a successful investing in Equities. Invest at least for 3 years through SIPs and hold the investments at least for 5 years. When you have to withdraw, again use SWPs (Systematic Withdrawal Plans). Start SWPs say a year or two before your goal is due. Keep taxes in mind.
6. Keep a regular check on your MF portfolio: Assign “Buy, Hold or Sell” ratings to your MFs at least once in six months. However, avoid shuffling your portfolio very often. If your Fund is not performing well, you can stop the SIP and see if the fund recovers in next few quarters. You should also check the risk (fluctuations). Continue investing if your fund is giving returns higher than the category average & if you are comfortable with the volatility. We believe that 12% CAGR is a reasonable return expected from Equity MFs in the current scenario.
7. Hire an expert: Equity investments are not a rocket science. Following above steps, you are likely to get on a good start. That said, consider outsourcing this job to your Financial Planner if you are unable to dedicate time or if you have a large size portfolio.
8. Manage logistics: Invest time in getting access to transact online & getting monthly email updates from your fund houses. You may have to fill in additional forms. This can save lot of running around.

Happy Investing!

This article was originally published on Stockmusings.com