Most of us choose equity as an asset class because it has a proven track record of beating inflation over the long term and allows us to invest in perhaps the most valuable economic entities of a nation – it’s companies and corporations. But not all companies are the same and that’s where from an investment angle, mutual funds come into the picture.
Equity mutual funds make the task of investing in equity much easier and simpler. However, many of us, especially when starting out, simply pick one fund and decide that’s it. This might work for some, but to create an effective long-term solution for your long-term objectives, what you need is a portfolio of the right equity funds rather than just a fund or two without any specific objective.
Here are four reasons why a portfolio is better than just a fund
Why no. 1 – A portfolio is better aligned to a holistic planning approach rather than a single fund
A proper financial plan considers your objective, your income, your needs and the timeframe you will have to achieve them. A single mutual fund simply can’t achieve needs for both long -term and short-term goals efficiently. Asset classes come with their own risk profiles and you can’t assign the same asset class to both long-term and short-term goals if you want to manage the risk effectively keeping in mind the growth requirements.
Why no. 2 – Exposure across sectors within equity
India has thousands of listed companies across multiple sectors engaged in multiple businesses. These companies also come in various sizes, or rather market capitalizations. Investing in the Indian equity market means taking exposure to the best companies across sectors.
Very rarely does a single equity mutual fund cover all available opportunities within listed Indian companies. Ideally, you need both big and mid-size companies in your portfolio.Most mutual funds invest in a specific proportion in different sub-asset classes and market categorisations depending on their investment objective. This means having at least one large-cap and one multi-cap equity fund in your portfolio to ensure exposure to growth opportunities from all angles.
Why no. 3 – Hedging your investments across funds and AMCs
When investing, you need to spread out your investments reasonably across funds and asset management companies, so you are not over-dependent on any one fund. This makes management not only easier for you but protects you from events that might cripple any one organization.
Very rarely does a single equity mutual fund cover all available opportunities within listed Indian companies. Ideally, you need both big and mid-size companies in your portfolio.
Why no. 4 – Funds can become misaligned with your investment objectives
There are very few funds that have remained consistent outperformers over a multiple decade time frame. Sometimes due to a change in a fund manager or bad decisions or overall change in approach, a particular fund that you started investing with won’t match your personal investment objectives. This means that you need to shift to a fund that is more aligned with your plans and objectives.
You will also add objectives as you go through life’s different stages. At different junctures, you will need to add specific types of fund which give you exposure to a relevant sub-asset class, such as US equity. As such, a portfolio becomes a necessity. This is better than relying on a single fund to do it all.
If you want to invest in equity effectively, you need a portfolio of funds rather than just a single fund. But don’t overdo it. For most long term objectives a portfolio of 4-8 equity funds across sub-asset classes can suffice.