Here’s How To Become A Better Equity Investor

The mystique that surrounds the stock market often attracts investors to it. Although many investors get attracted to the stock market by the prospects of high returns, the attendant risks make them jittery from time to time. In reality, equity as an asset class has the potential to deliver higher returns than other asset classes provided one invests for long-term and follows a discipline of investing on a regular basis. Besides, a well-defined time horizon allows investors to tackle volatility from to time.

However, apart from the anxiety caused by volatility, investors often have to grapple with issues/situations that require a proper understanding of potential as well as attendant risks of investing in equities. In fact, the level of success investors can achieve over time depends on how well they tackle these situations. Investing through mutual funds is one strategy that can help investors in tackling situations like which stock to buy and when to buy. Another important decision taken by the fund managers on their behalf is when to sell these stocks. Apart from these situations, investors often have to face issues that may create doubts in their minds. It is crucial to tackle them well to keep the discipline in their investment process. Here are some issues that investors have to face during their investment time horizon and how they need to tackle them:

Why is there a gap in the performance of funds?

Investors often get confused when they see a huge gap in the performances of different equity funds in their portfolios. They often equate it with non-performance of funds that have lower returns. However, the gap could actually be on account of investment philosophy of the fund and the type of fund i.e. diversified, large-cap, mid-cap or small-cap fund one is invested in.

As investors own a variety of funds, a situation like this arises from time to time. That’s because different segments of the market perform differently at different times. As the tide shifts in favour of a particular segment, the performance of funds focusing on that segment improves.

Should I worry about portfolio turnover?

A portfolio turnover reflects how frequently securities are bought and sold by the fund. A 100 per cent portfolio turnover rate indicates that the portfolio was completely turned over in a year. Portfolio turnover generally varies --with market conditions and investment category.

For a MF investor, it is important to know that an aggressive equity fund is most likely to have a high turnover rate. Some debt funds also have high turnover rates. A fund with a high turnover rate will incur more transaction cost compared to the one with lower turnover. Unless the superior stock selection provides benefits that offset the additional transactions cost, the returns are likely to be impacted in a fund that has high portfolio turnover.

Why do fund managers keep cash?

Fund managers generally keep cash in hand to take care of redemptions. Besides, as the money comes in from new investors or in the form of dividends, it accumulates in cash before it can be invested. In other words, a fund manager keeps cash in hand not to benefit investors but to facilitate the management of fund.

While there is no hard and fast rule with regard to the level of cash as a percentage to the overall portfolio size, most funds in normal circumstances keep it up to 5 percent. However, there can be occasions wherein the fund manager may keep cash at much higher level. This could be for various reasons such as cash generated by selling of securities to book profits; volatile markets may force the fund manger to wait for the market to settle before investing; or huge inflows over a certain period of time.

Why does the market move in opposite directions?

This is a situation which investors face many a times. Actually, this happens when one tries to time the market. It is a well-known fact that even the most experienced fund managers find it difficult to time the market successfully on a consistent basis. No wonder, when a common investor tries to do this, he invariably finds the market moving in the opposite direction.

While it is a fact that even a long-term investor needs to book profits, the key to success is to have a proper strategy in place. One such strategy is to rebalance the portfolio periodically. Rebalancing is a method by which the allocation to debt and equity are brought back to the original level. This is necessary as one asset class grows faster than another. Rebalancing becomes necessary because one makes investments to achieve best results at an acceptable level of risk. By doing nothing, one violates this premise and gets exposed to unacceptable level of risk.