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Do you have a core portfolio in place? | July 12, 2008 15:42 IST

At Personalfn, we regularly interact with investors who need assistance with their financial planning. And often the latter entails (among others), conducting a review of their existing investment portfolios. An increasingly common and rather disturbing trend is the absence of a solid 'core' portfolio.

In recent times, we have met several investors (most were new to investing in mutual funds) whose investment portfolios were constituted of only thematic and sectoral funds. To further complicate matters, these investments were made in new fund offers launched at a time when markets were surging northwards. Expectedly, such portfolios are in dire straits at present.

The core portfolio

By the core portfolio, we are referring to a mix of investment avenues that is capable of delivering an enduring performance across market cycles.

For instance, in the mutual funds segment, well-managed diversified equity funds, balanced funds and monthly income plans with proven track records could form the core portfolio. Of course, the investor's risk profile and investment objectives would play a part in determining the core.

Once this core is in place, the investor can consider (if at all) allocating a smaller portion of his investible surplus in ancillary offerings like thematic/sectoral funds and global/international funds. However, given that the reverse seems to be the order of the day, it is certainly a cause for concern.

What lies beneath?

So what causes this imbalance? There are several reasons. In rising markets, investors can and do succumb to the unwarranted hype accompanying certain investment avenues. Fund houses and mutual fund distributors do their bit to convince investors of the merits of every offering ranging from infrastructure funds, funds investing in global markets to those investing in commodity stocks.

Of course, the downside risk of such an investment and/or its precise allocation in the investor's portfolio rarely features in the sales pitch.

Investors need to share some blame as well. For some inexplicable reason, several investors have a fascination for 'new' offerings. Investors are willing to get invested in an offering simply because it is new and its investment proposition seems innovative. Aspects like the avenue's aptness or its ability to add value to the portfolio are conveniently ignored.

Got something new in your portfolio?

Finally, the single largest factor responsible for this phenomenon is that investments are made in a haphazard manner. The recommended method for investing entails first defining the investment objectives and then drawing up investment plans that can aid investors achieve the stated objectives.

However, it is not uncommon for investors to skip the first step (i.e. defining the objectives) and get invested in an adhoc manner. This is akin to starting off on a journey without a roadmap. The results aren't hard to guess.

What investors should do

For starters, investors must appreciate that investing is all about achieving certain goals. Hence, there is no place for things like 'fascination for new' while investing. The key is to have in place a strong core that will be resilient in testing times and yet enable the investor achieve his goals over the stipulated investment horizon.

An investment advisor/financial planner can play a vital role in building the core portfolio. Beyond this, subject to the investor's risk profile and availability of surplus monies, smaller allocations can be made to avenues that can provide a fillip to the portfolio.

However, while doing the same, the higher risk involved shouldn't be ignored.

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