Investment advisers can add value to your portfolio. But it is entirely up to you to effectively use your adviser. In this article, we discuss about how you should effectively use an investment adviser, if you hire one.

Goal-based investing

We start on the premise that your investment portfolio has two parts. One, the core portfolio, relates to goal-based investing. The primary objective of this portfolio is to generate acceptable returns so that the portfolio value at the end of the investment horizon is enough to meet your life goal. The second part, the satellite portfolio, is created to take advantage of short-term market movements. You do not have to hire an investment adviser to manage both parts of your investment portfolio. It would be logical to hire an adviser to manage your core portfolio — the most essential part of your total investments. Moreover, self-managing the satellite portfolio gives you emotional satisfaction; beating the market and earning short-term returns can be rewarding. We suggest that you do the other way! That is, you should self-manage your core portfolio and outsource the management of the satellite portfolio to your adviser, if you hire one. Why? Setting up the core portfolio is not difficult. Suppose you want to buy a house eight years hence. You should know the portfolio value you require at the end of that period to buy the house. This is, the current value of a similar house that you want to buy inflation-adjusted for eight years. Next, you should decide on your monthly savings to achieve this goal. Finally, assume that the post-tax expected return on bonds is 5.25 per cent (7.5 per cent interest and 30 per cent tax) and that on equity is 12 per cent. So, based on the proposed savings and expected asset returns, you can arrive at the preferred asset allocation.

Thereafter, you have to create two systematic investment plans (SIPs) — one on a large-cap index fund and another on a bank recurring deposit. Managing the core portfolio requires disciplined savings, not deep knowledge of the markets; the objective is to earn market returns to achieve your life goals.

Adviser Alpha

Your satellite portfolio is different. This is created to take advantage of short-term market movements. There are plenty of investment products designed to beat the market. Selecting a handful of them to create your satellite portfolio can be difficult and confusing.

Should you buy a mid-cap active fund or a large-cap fund? And then, which active fund should you choose? Or should you make direct investment in shares or trade ETFs? Which shares should you buy? When should you enter and exit?

Given the numerous questions you have to answer, there is room for regret if your decisions turn wrong. This behaviour can affect your subsequent decisions. Then there is the issue of time.

For unlike your core portfolio, your satellite portfolio has to be actively managed. Can you continually devote time to self-manage your satellite portfolio?

If not, you should consider outsourcing the management of your satellite portfolio to an investment adviser. But that is easier said than done.

So, how can you trade-off facing regret due to wrong decisions and experiencing emotional fulfilment from beating the market? We suggest that you initially outsource your satellite portfolio to your adviser, if you choose to hire one.

After you accumulate sizable gains in your satellite portfolio, take-out 25-30 per cent of these gains and trade directly in the market. You should leave the rest of your satellite portfolio with your adviser.

The writer is the founder of Navera Consulting. Send your queries to portfolioideas@thehindu.co.in

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