VR Logo

How to draw an owl

Guides and tools on the internet often promise a lot but only a few can deliver what you need

How to draw an owl

There's an old joke about internet tutorials. It's told around a drawing tutorial which teaches readers how to draw an owl. The tutorial has three steps: 1) Draw a small circle; this will become the head. 2) Draw a large oval below it; this will be the body of the owl. 3) Now you're almost done. Just draw the rest of the owl.

How to draw an owl

The joke is funny because it's true. From carpentry to haircuts to cooking to computer programming, you can find any number of tutorials on the internet that basically fall in the 'draw-the-rest-of-the-owl' category. Mutual fund investing is no different. Here's a 'rest-of-the-owl' tutorial on how to invest in mutual funds:

  • Decide on an asset allocation suited to your financial situation and goals
  • Buy a diversified set of mutual funds that meet that asset allocation
  • Rebalance from time to time to maintain the above asset allocation

That's it. That's all there is to it. Except... The beginner has to ask 'How'? How do I draw the rest of the owl? The funny thing is just like drawing the owl, the first two steps are not all that difficult to learn. They are conceptual steps and even if you can't do it right from scratch, you can find a ready-made recipe that will enable you to choose the funds to invest in. The advice could be bad or it could be good, especially if you use the facilities on Value Research Online to do this.

However, the ready-to-use knowledge will only take you that far. The third part is actually the hardest because it never ends or even pauses. It requires eternal vigilance (although not every day) to ensure that your plan is on track and that you are sticking to your asset-allocation plan. How do you do that?

But beyond that? Let's take a concrete example. Let's say that you are a premium member of Value Research Online and after putting in your goals and requirements and studying the reports as well as our 'Analyst Choice' set, you have arrived upon an asset allocation that is best suited to you. 70 per cent of your money is in a Nifty index fund, which gives a base of stability and conservative returns, while the remaining 30 per cent is in small- and mid-cap funds. These funds will provide the extra garnish of aggressive returns. However, the allocation and rebalancing are a very important part of this portfolio.

A portfolio is not just a collection of investments. It is a set of investments that fit with each other and serve a certain purpose when they are present in a certain proportion. 'In a certain proportion'. Mark that phrase. In the above portfolio, the identities and types of funds are not any more important than the 70:30 ratio. If the markets hit a two-three-year patch when small and mid caps are doing much better than large caps, then the ratio of this portfolio could automatically become 50:50. Here's the important part which lots of investors do not appreciate: It's not the same portfolio any more, even though the funds are the very same.

Your portfolio has changed without you realising. It does not serve the original purpose any more. If small and mid caps crash now, as they do with great regularity and severity, then the value of your portfolio will crash too. The solution is to keep an eye on the actual break-up. When it deviates from the 70:30 ratio, then you must sell out of the funds that have grabbed more than their share and with that money, buy the other set. Of course, this will be highly tax-inefficient. As it happens, if your portfolio is in the inflow mode, then you may not actually need to sell anything. As the value shifts, divert more and more of the inflows to the part that needs to be shored up. If this is not enough, only then you need to actually sell and shift money.

The question is, how are you actually going to do this? How is the owl going to be drawn? As I'm fond of saying, that's where Value Research Online comes into the picture and not just the normal part of our service that has been around for 20+ years, but the new Premium service. We'll draw the owl for you and this is how we will do it. We will:

  • Provide a way for you to articulate your goals clearly.
  • Suggest a set of investments and a pattern of investments for those goals.
  • Verify that your existing investments fit the goals and suggest changes if they do not.
  • Continuously monitor your investments to make sure they are heading for your goals, suggest changes if any are required.