Hold on to a lazy portfolio

Have a mix of index funds, diversified equity schemes and fixed deposits.

Nobel prize winning economist Paul Samuelson had famously said: “Investing should be more like watching paint dry or grass grow. If you want excitement, take $800 and go to Las Vegas.”

With stock markets going nowhere and fixed income instruments offering high returns, a typically active retail investor would like to juggle around his portfolio to earn the best return on investments.

But what happens, when the markets turn around in say, six months or one year?

Over dependence on debt would mean that to participate in the ‘equity rush’, one has to break fixed deposits (FDs) and move into stocks or equity funds.

The confusion can be worse because taking out money mid-way and moving into equities would mean loss of interest income and, perhaps, even a penalty. With market and interest cycles turning every three to four years, sometimes even sooner, retail investors cannot always keep churning portfolio.

To ride a wave of uncertainty and continue to earn returns, albeit lower in bad times, one needs to stay invested. And importantly, be lazy. Do not get fidgety or nervous with the yo-yoing markets or the rising interest.

Being lazy does not mean you don't track investments. It means not wanting to take advantage of every situation.

Constructing a lazy portfolio is quite simple. For equity investments, find the best-performing equity diversified funds and invest, either through systematic investment plans or a lump sum.

If you are not confident of picking the right fund or the statutory warning 'past performance is not a guarantee of future performance' scares you, certified financial planner, Gaurav Mashruwala's solution is index funds.

“These funds replicate the market. Keep tracking your portfolio on a quarterly basis. But do not churn regularly. Stay invested for as long a time horizon as you can. And never try to time the market,” said Mashruwala. For the fixed part of portfolio, invest in FDs for over five years to take advantage of 80C benefits.

There are three main reasons why lazy portfolios can be winners. For one, they’re simpler. You will never need more than a few mutual fund schemes. So forget the hundreds of schemes out there.

Two, you save on commissions and transaction costs that you would have to incur if you are a hyperactive investor.

Three, you save the enormous amount of time and effort that an active investor would spend worrying about investments.

Forget about the frequent rebalancing, market timing and active trading. Just create a well-diversified portfolio and stop tinkering.

Say you have decided on a 80:20 portfolio, the equity investments should be in few well diversified funds.

One could take five-year returns of 40-50 diversified equity mutual funds available in July 2006 and invest 20 per cent of the lump sum or through SIPs.

If one were to take the lump sum route, a scheme like UTI dividend yield fund, would have returned 21.6 per cent annualised over five years ( from 15 July, 2011), or in absolute returns 166.2 per cent.

Similarly, locking into a five-year fixed deposits would have returned 8.5 per cent annually. An 80:20 portfolio would have earned around 18.98 per cent annually. Even in high inflation times, this returns would comfortably beat it.