MF portfolio construction – how to allocate your investment

In the previous posts we have covered the structure of the MF portfolio you should be having and how to select the specific funds in the different categories. You will also be having an idea of how much to invest in MF monthly, based on the goals you have set for yourself. In case, you are needing more clarity on this aspect read through the two series on Financial Planning and Goal Based Investing that I have in the blog. Each of these have 10 posts and cover the topics exhaustively.

For the purposes of this post, let us assume you need to invest 20000 Rs per month for the next 20 years in order to meet all your goals. Of course, MF portfolio will not be your only source, you will be having a debt and a stock portfolio too. Now the question becomes, how should you allocate this amount into the 4 funds that you have chosen from 4 different categories? Well, an obvious way will be to just put 5000 Rs in each fund monthly and be done with it. This is actually not a bad strategy and can be followed by most people. Regular investment over a long period of time will make your money grow substantially, if not in the most optimal manner. For people who want to keep it really simple, I will recommend this. Decide on the funds, set up an automated SIP and be done with it.

What if you are a more aware investor and have some preferences for particular categories of funds? In this case you will need to channel more of your money to your preferred category. In general the large cap and multi cap funds will have lower risk and volatility as compared to the mid cap or small cap funds. If you are a conservative investor and do not want to deal with volatility beyond a point then put more of your money in Large cap and multi cap funds. On the other hand if you are an aggressive investor and are willing to stomach some volatility in the hope for greater growth then more of your investments should go into the mid cap and small cap funds. Note that these amounts can be fixed too in terms of percentage allocations and an SIP set up.

Now you may also be an evolved investor who wants to ensure that his investments are being used in the most optimal manner. In this case you will need to vary your investments with a linkage to the market. I have already explained a mechanism for doing this in an earlier post about how to do a modified SIP and you may follow that or son other means. There are two basic ways of achieving this – you can either do a standard SIP and add more investments manually at lower levels of the market, or you can have a truly variable SIP where you decide on the monthly allocation based on the market situation. My recommendation is that only serious investors who are willing to track the markets and make their investments accordingly should get into this mode. For all others, a regular SIP can also work quite well.

So, to summarize for a fixed investment amount the following are your investment allocation options:-

• Fixed SIP with either equal allocation to all 4 categories or different allocations to the 4 categories.
• Variable SIP where you decide monthly on your investments, all adding up to your total monthly investment. Any surplus money can be allocated as explained above.

What happens when I can increase my monthly investments over the years, as will normally be the case? For the fixed SIP you follow the same % allocations, the amounts will obviously increase. For variable SIP, you again follow exactly the same mechanism as before, albeit with the increased amounts.

Now for many people, the amounts available for investment initially will be low and they will grow over a period of time. For example a person starting off his career may be able to invest only 5000 Rs in his first year of working and increase it to 20000 Rs or so by the time he reaches his 5th year. In such a case you need to follow the sequence I am suggesting:

• Depending on money availability first invest in large cap fund and then multi cap fund.
• With time build up your investments amounts in these 2 funds to the level you need eventually.
• Start investing in the mid cap and small cap fund now and build up these investments as above.

Many people have asked me the question whether they should continue their investments if the markets are falling in a sharp manner. The answer to that is an unequivocal “yes”. The whole idea of success in equity investments is to procure financial assets at a low price and a falling market allows you to do just that. Your fixed investment in SIP will buy you more units when the markets fall, if you can afford to put more money you should do so.

An opposite situation will be when the markets are rising over a period of time. Here too, as a regular investor you should just stick to your investment allocation. You are now buying units at a greater price but over the long term these units are anyway likely to appreciate in value. If you are an evolved investor then you can reduce your investments for the time being, keep liquid cash or debt available and bring this investment to buy more units when the market turns. Note that though this strategy is financially sound, it does require good understanding of the markets and a fair bit of time.

All this is good but should you invest one time in MF if you have some surplus money? How does one time MF investment compare with SIP as a strategy? I will address this issue in my next post.

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