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Rule No. 1: Never Lose Money. Rule No. 2: Never Forget Rule No. 1.
Easy as this may sound, all of our investment lessons from 2019 can be summarised with this one simple quote of Warren Buffet.
2019 has been a unique year for Indian markets for many reasons. On one hand, where top companies from Nifty and Sensex were continuously going up, the entire universe of remaining stocks had an extremely volatile journey. This volatility was also seen in Equity Mutual Funds.
Whereas, in the debt industry, credit crisis prevailed throughout the year showcasing negative returns in some of the debt funds.
Hence, We are revisiting 2019 to present to you some of the valuable investment lessons and we are hoping that these will help you take steps in the right direction when you are planning your own investments.
Quality precedes the Quantity
How the returns are generated is more important than how much returns are generated. 2019 was a year when many debt funds gave negative returns because of their exposure to defaulting bonds, for example, DHFL, Reliance ADAG, Sintex, Altico, Essel Group. The credit quality of the debt funds then came to the forefront.
The funds with good quality debt papers had a consistent performance even during the credit crisis. We believe, that consistency of the return is the most underrated factor in the mutual fund analysis. You can use this guide which illustrates the risks in debt funds to shortlist the potential funds.
Lesson: While selecting a debt fund, only looking at past performance can be misleading. For a sustainable and consistent performance, the focus should always be on the quality of the fund.
We should focus more on Portfolio Return than the Individual fund return
Many times, Investors share a tale of how they doubled their money in a particular stock. But they fail to calculate the entire portfolio return. Because if you have more losers in the portfolio than winners then you will end up having negative returns on your portfolio.
All the investment goals can be divided into two categories: Wealth Creation or Wealth Protection. In both cases, it is important to generate a return that will beat inflation. Here diversification comes in play. In 2019, some of the fund categories like large-cap gave good returns whereas some categories like Small Cap gave negative returns. Now if your portfolio only had small caps you would not be able to beat the inflation. But if you had large caps in the portfolio, you would be happy with the returns.
Lesson: While reviewing the portfolio, instead of obsessing over only one security focus more on the entire portfolio return and on an annualized basis this return should at least beat the inflation to get a positive real return. And if not, then what? This brings us to our next lesson.
Asset Allocation is a way to get consistency in the portfolio
Asset Allocation in simple words is a strategy of creating a portfolio with a mix of different asset classes. The idea behind the asset allocation is that when one particular asset class is not performing well there should be a substitute that does perform well. And hence in every market cycle, you can have a positive portfolio performance.
Allow is to demonstrate this with an example:
As you can see the two portfolios: one with only Indian Equity and the other with a mix of Indian Equity, International Equity, Debt, Gold. The portfolio with multiple asset classes does well across different time periods as compared to a portfolio with only one asset class.
Hence, even in extreme volatility, such portfolios can deliver consistent returns.
(Please note that this is just an illustration and not a recommendation)
Lesson: While building a portfolio, diversification means having multiple assets and not just multiple schemes. Take the help of an advisor to create such portfolios which will weather every market cycle.
These lessons summarise the year 2019 for us. We do hope that these add value to your decision making when you are creating your portfolio.
Investica wishes you a very happy and successful New Year!