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Brighten Up Your Financial Future with This Successful Investment Strategy
Nov 17, 2020

The equity market has fully recouped the COVID-induced market crash loss. With this dramatic turnaround, the S&P BSE Sensex has scaled an all-time high level of 43,000. India is seeing strong signs of economic revival with most sectors unlocking after months of strict lockdown, which has resulted in positive investor sentiments.

The Index of Industrial Production turned positive in September after six months of contraction. Likewise, the Manufacturing Purchasing Managers' Index rose to 58.9 in October, the highest since 2008 indicating bounce back in demand amid the festive season.

Recently, Finance Minister Nirmala Sitharaman announced another round of stimulus to boost sentiment and solidify economic revival. According to the government, the size of the stimulus under the package amounts to Rs 2.65 lakh crore, taking the total stimulus announced by the government and RBI so far to Rs 29.87 lakh crore, which works out to a significant 15% of national GDP.

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The following are some of the prominent measures that Ms Sitharaman announced to stimulate growth:

  • Additional outlay of Rs 10,000 crore under the Prime Minister Garib Kalyan Yojana to boost rural employment in the informal sector
  • Emergency Credit Line Guarantee Scheme (ECLGS) till March 31, 2021, to provide liquidity support to the 26 stressed sectors of the economy
  • Production-linked incentive (PLI) extended to 10 more sectors to provide an impetus to domestic manufacturing and exports growth
  • Setting up of Rs 1.10 lakh crore platform for infra debt financing through equity infusion of Rs 6,000 crore in the National Investment and Infrastructure Fund

The measures are expected to go a long way in supporting economic growth in the coming years. Buoyed by the return of positive sentiments and growth expectations, Foreign Portfolio Investors (FPIs) have been investing abundantly in the domestic market, thus fueling the rally.

Firm global cues such as the election of Joe Biden as the President of the United States of America and optimism regarding efficacy of COVID-19 vaccine also boosted indices growth.

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Going forward, it remains to be seen if the demand revival sustains once the festive cheer is over. A second wave of virus outbreak could dent investor confidence.

Notably, despite the recent rally, most sectoral indices, barring IT and Pharma that benefitted immensely from the pandemic, are in a negative zone compared to last year. This indicates that the few stocks that benefitted from liquidity infusion in the market fueled the rally.

Table: Most sectoral indices are down despite market rally
Index Current value 1 year ago % change
Nifty Bank 28278.8 30541.6 -7.40%
Nifty Auto 8284.1 8150.2 1.60%
Nifty Financial Services 13743.4 13806.4 -0.50%
Nifty FMCG 31240.2 31582.5 -1.10%
Nifty IT 21363.4 15241 40.20%
Nifty Metal 2636.9 2556.7 3.10%
Nifty Pharma 11600.8 7660.5 51.40%
Nifty Realty 238.6 278.3 -14.30%
Data as on November 12, 2020
(Source: NSE, PersonalFN Research)

Corporate earnings of several companies that have a higher share of rural business on better-than-expected rural demand, the stimulus measure by the government, second consecutive year of above-normal monsoon, and with cost rationalisation measures have fortunately improved in Q2FY21. The rise in exports has helped certain export-oriented ones.

Certain companies in IT, FMCG, healthcare, cement, building materials, auto, and financials have posted encouraging results in Q2FY21. But until the COVID-19 pandemic persists, earnings may remain under strain; we may see uneven earnings.

Managements of companies have hinted that the current challenges would impact revenue and net profits this financial year.

Therefore, as an investor, one needs to be prepared for volatility on account of any development in the domestic or global front by optimally diversifying their investment portfolio.

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How to optimally diversify the investment portfolio?

Instead of holding a handful of stocks in your portfolio, it would be advisable to invest in a diversified portfolio of equity mutual funds that can help limit the downside and participate well in the recovery and rally phase.

If you have a long-term investment horizon and are looking to earn a real rate of returns that can counter inflation and help achieve your desired financial goals, follow the 'Core & Satellite' approach to investing - an investment strategy followed by some of the most successful equity investors.

This strategy will help you builda robust all-weather portfolio with the best equity mutual fund schemes.

The 'Core' holding should comprise around 65%-70% of your equity mutual fund portfolio and consist of large-cap fund, multi-cap fund, and a value style fund.

Whereas, the 'Satellite' holdings of the portfolio can be around 30%-35% comprising of a mid-cap fund, a large & mid-cap fund, and an aggressive hybrid fund.

To build a 'Core & Satellite' portfolio of some of the best equity mutual fund schemes, here are some ground rules:

  • Consider funds that have a strong track record of at least 5 years and have been amongst the top performers in their respective categories
  • The schemes should be diversified across investment styles and fund management
  • Ensure that each selected scheme abides with its stated objectives, indicated asset allocation, and investment style
  • You should not only invest across investment styles (such as growth and value) but also across fund houses
  • 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
  • Not more than five schemes managed by the same fund manager should be included in the portfolio
  • Not more than two schemes from the same fund house shall be included in the portfolio
  • Each scheme that is to be included in the portfolio should have seen an outperformance over at least three market cycles
  • You should restrict the count of mutual fund schemes in your portfolio to seven

Once you create an all-weather portfolio, monitor it at regular intervals (bi-annually), rather than timing the market. Following such an approach to mutual fund investing tends to work well in the long run.

Here are six advantages of the 'Core & Satellite' Approach to investing:

  1. Provides optimal diversification
  2. Lowers the need for constant portfolio churning
  3. Reduces the risk involved in your portfolio
  4. Helps you benefit from a variety of investment strategies
  5. Allows you to create wealth cushioning the downside
  6. Holds the potential to outperform the market

If you wish to invest in a readymade portfolio of top recommended equity mutual funds based on the 'Core & Satellite' approach to investing, I recommend subscribing to PersonalFN's Premium Report, "The Strategic Funds Portfolio For 2025 (2020 Edition)". This premium report will help you build your optimum mutual funds portfolio for 2025 with no effort on your part. If you haven't subscribed yet, do it now!

Author: Divya Grover

This article first appeared on PersonalFN here.

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PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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