Do your mutual funds stand the test of character?

'In times of adversity, true character is revealed' - that's an adage relevant not only to humans, but also investment avenues like mutual funds. Any analyst worth his salt will vouch for the fact that in rising markets, it is hard to distinguish the men (proven and invest-worthy funds) from the boys (also-rans). Buoyed by conducive market conditions, even mediocre funds can deliver an extraordinary performance. Often the mantra is - take on above-average risk and ride the wave.

But when the tide turns (as it has over the past 12-14 months), a fund's mettle is truly tested. The last few months have been particularly interesting. With the markets hovering around the 8,000-point mark, despondency had all but set in. And then came an uptick that took everyone by surprise. Speculation regarding 'the worst being over' and 'the commencement of a recovery' was doing the rounds. But alas, the victory celebrations seem to have been interrupted by the impending election results and the possibility of another hung parliament.

If you are an investor, it can be safely stated that these aren't happy times. The uncertainty is certainly not helping. But all is not lost. On the contrary, this is an opportune time to evaluate your mutual fund portfolio.

The evaluation needs to go beyond the obvious i.e. how a given fund fared on the downside. Sure, the latter is important and will play a significant part in the process. However, an equally vital evaluation will pertain to identifying the fund's 'true character'.

Each fund has a professed investment style; in mutual fund parlance, this is referred to as the fund's positioning. Say Fund A in your portfolio may be positioned as a mid cap fund. Now is the time to determine if the fund manager has walked the line and adhered to the stated investment style i.e. irrespective of the market conditions, does the fund continue to be invested in mid cap stocks in line with its investment objective/positioning.

There will be a case for raising a red flag if you come across the professed mid cap fund making substantial investments in the large cap segment, simply because the latter has been less impacted during the downturn.

Then there are funds which state that they will be fully invested at all times i.e. they will refrain from taking cash calls. This investment style often flows from the philosophy that fund houses are custodians of investors' monies for investment purpose as opposed to holding cash (making investments in current assets).

The red flag scenario: A fund house which believes in holding portfolios that are fully invested at all times, performs a volte-face and holds a substantial portion of its portfolios in cash to minimise the brunt of falling markets.

Hybrids i.e. balanced funds and monthly income plans (MIPs) are often referred to as tools of asset allocation, on account of investments in both equities and debt. Theoretically, by diversifying across asset classes, hybrids are better equipped to safeguard the investor's interest when a given asset class hits a rough patch. When equity markets run into rough weather, a balanced fund can score over a conventional equity fund on account of its debt holdings.

Now is the time to find out if the hybrids in your portfolio are playing their part as required. Failing to do so (say a balanced fund that insists on being largely invested in equities akin to a conventional equity fund) defeats the purpose of investing in a hybrid.

Why it is vital to conduct the aforementioned exercise
Wondering why it is vital to conduct the aforementioned exercise (incidentally, the above list is not a comprehensive one; these are some among several tests that can reveal a fund's true character). Another question could be that some of the 'red flag' scenarios were aimed at protecting investors' interests. Hence the same should not be held against the fund house. Here's why this argument doesn't hold good.

A fund is not an 'end', it is simply a 'means' to achieve an end. In other words, the fund should find place in a portfolio because it can play a specific part. And the part played by the fund is inextricably linked to its nature/unique characteristics. Should the fund deviate from its defined character, there's a fair chance that the portfolio might fail to deliver on expected lines and in turn, the investor may fail to achieve his financial goals.

What you must do
As an investor, you must ensure that you are invested in funds that have a defined character and a reputation of not having deviated from the same. Furthermore, once the investments are made, a review of the funds' performance (including adherence to their stated investment style) must be made. The financial planner/mutual fund advisor will have a critical role to play in the review process; expectedly, the same must be conducted on an ongoing basis over a period of time. The advisor will be equipped to distinguish minor aberrations from significant deviations. And given the challenging investment scenario we are faced with at present, the resolve of even the most resolute fund houses and fund managers is likely to be tested. Hence, the importance of conducting a thorough review now!

5 investment tips from Batman

Surprised to read about Batman and investments in the same sentence? Don't be. Not many would associate a comic book character with investing. However, there's a lot that investors can learn from the Dark Knight and his modus operandi.

Here are 5 investment tips from Batman.

1. No super powers, but he's still a super hero!

Interesting, isn't it, Batman has no super powers. Unlike his fellow caped crusaders, he can't fly; neither can he spin a web and swing across buildings. In effect, he is a super hero with no super powers. All he relies on are his physical and mental skills like a mere mortal. And yet, he emerges a winner every time.

Similarly, investors must appreciate that they don't need to be 'investment gurus' to achieve their financial goals. All they need to do is, invest in a disciplined manner and keep things simple at all times. For instance, investors should be unambiguously aware of their investment objectives i.e. what they want to achieve via their investments. Also, they must understand the characteristics of the investment avenues deployed i.e. the pros and cons. Having a contingency plan i.e. a 'plan B' is vital as well. There's no reason investors can't succeed, if they stick to the basics of investing and adopt a diligent approach.

2. The omnipresent Batsuit and Batmobile, among other gadgets

Ever noticed how Batman uses a plethora of gadgets. But primary among them are the Batsuit (with the utility belt) and the Batmobile. No matter what the situation, the aforementioned always have a role to play. While other gadgets keep appearing in an intermittent manner, these are the mainstays of his arsenal.

Investors must ensure that they have a solid core portfolio in place. It can be comprised of various avenues like mutual funds that have stood the test of time, bonds/instruments backed by a sovereign guarantee. Gold must find place in every portfolio from an asset allocation perspective. Although not in the domain of investments, the importance of being adequately insured cannot be overstated. A term plan is an ideal way to acquire a substantial insurance cover at a low cost. Opting for medical insurance is pertinent too. Once a solid core portfolio has been built, other avenues can be included in the portfolio, depending their suitability for the investor.

3. Robin and Alfred to the rescue …

Despite the fact that he's a bonafide super hero, Batman is never short on allies. For example, for advice, he turns to his mentor Alfred, who also doubles up as his butler. And, when its time for action, Batman's protégé Robin isn't far away. Commissioner Gordon and Lucius Fox have a part to play in Batman's crime-fighting escapades too.

For investors, the most important ally is the investment advisor/financial planner. This individual should act as the bridge between investors and their financial goals. He is required to have a fair degree of expertise as far as investments go and must consistently work in the investor's interests. Investors on their part must ensure that they are always associated with a competent and committed investment advisor.

4. Batman preys at night

Unlike other super heroes who operate in broad daylight, Batman preys at night. In fact, he uses the cloak of darkness to his advantage. In other words, he steers clear of the herd mentality and adopts an approach that is suited to him. That makes Batman, a bit of a contrarian vis-à-vis his peers.

It is not uncommon for investors to get swayed by trends and popular opinion while making investment decisions. Over the past few years, avenues like tech stocks/funds, ULIPs (unit linked insurance plans) and NFOs (new fund offers), among others have at various points in time, captured the investor's fancy. Several investors have been guilty of getting invested without fully understanding the investment proposition on offer or evaluating the suitability. Typically, this phenomenon can be attributed to herd mentality i.e. investors got invested simply because everyone around them was doing so. It is important for investors to make investment decisions based on what is right for them, rather what everyone around them is doing.

5. The baddies keep coming back …

Batman has to contend with an impressive list of super villains - the Joker, the Penguin, Two-face, the Riddler, to name a few. Sure, Batman beats them every time, but they keep coming back. And the eternal battle between good and evil continues like an ongoing saga.

It's no different with investments. The process never really comes to an end, not even for investors who may have that ideal portfolio in place. Changing economic environment and risk appetite are some of the factors that necessitate a constant review of one's investment portfolio. A fulfilled need will be replaced by the emergence of a new one. Investors would do well to appreciate that investing is not a one-off activity. This in turn, reinforces the need to devote adequate time to the investment exercise.

Clearly, there's a lot that one can learn about investing from the Dark Knight. From an investor's perspective, the key lies in utilising these pointers to achieve his financial goals.