You can outsource decisions relating to your personal investment process. In this article, we discuss about the investment decisions you can outsource. We then explore whether you should outsource each of these decisions.

What to outsource?

An important step in your personal investment process is the security selection decision. This ranges from your decision to invest in, say, HDFC Bank or ICICI Bank, to when to buy and sell financial gold. Outsourcing your security selection decision involves choosing an appropriate mutual fund or ETF. But choosing an equity fund is not always easy. If you believe that a fund manager can beat the stated benchmark index, then buy the active fund. Otherwise, buy a Nifty or Sensex-based index fund.

Your security selection decision relating to fixed income is easy. Select bank fixed deposits that are appropriate for your life goals. For instance, if you are saving to buy a house 3 years hence, invest in a three-year fixed deposit. You can choose from among the larger private sector and public sector banks.

But what if you want to outsource your asset allocation decision? This relates to the process of allocating your investable capital into various asset classes such as stocks and bonds. You may then have to consider a balanced fund. Such a fund will invest in both equity and bonds based on the fund’s mandate. Note that a balanced fund will not necessarily invest equal proportion in equity and bonds.

One of the benefits of investing in balanced funds, is that the portfolio manager is better placed than you are to decide when to sell equity (bonds) and invest more in bonds (equity).

Finally, what if you want to invest in a variety of mutual funds and are confused about choosing your investments? Consider fund-of-funds. Such a mutual fund invests in other mutual funds and, therefore, helps you outsource your manager selection decision- the decision on which fund to choose.

When to outsource?

Your decision to outsource should depend on your investment objectives. You should consider outsourcing your security selection decision for your core portfolio (goal-based portfolio). This means your preference should be to invest in equity funds to meet any of your life goals.

You should choose a balanced fund for your core portfolio only if you prefer to invest in bond funds. But if you want to accumulate Rs 1 crore in 5 years, investing in a 5-year fixed deposit can help you achieve the objective with certainty, as the deposit’s maturity value is fixed. Your investment in a balanced fund is based on net asset value. This means your balanced fund investment will fluctuate in line with the price movements in the equity and the bond markets. What if the bond market declines sharply when you need the money to buy the house?

Finally, outsourcing your manager selection decision may not be necessary if you use a thumb-rule asset allocation. That is, if you are younger than 45, you could choose between 50 and 75 per cent equity allocation. Between age 45 and 55, reduce your equity allocation periodically so that you have about 25-30 per cent in equity at age 55. As for your satellite portfolio (non- goal-based portfolio), you should self-manage your direct equity investments or outsource only the security selection decision to investment advisers.

(The author is the founder of Navera Consulting. Feedback may be sent to portfolioideas@thehindu.co.in)

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