Crafting an Effective Mutual Fund Portfolio

Investing in mutual funds serves as an excellent avenue for individuals to diversify their investment portfolios and potentially achieve higher returns. However, constructing a well-balanced mutual fund portfolio requires deliberate consideration and a thorough understanding of the myriad factors that can influence your investment success. There are no golden rules for creating a mutual fund portfolio. However, it should be predicated on two basic principles. The first principle is the principle of investing in sync with your goals. You cannot invest in mutual funds in isolation. The second guiding principle is about discipline. The mutual fund portfolios are about time in the market, not timing.

How much should you allocate to a mutual fund performance?

Ideally, you must save and invest 20% of your income. Your portfolio allocation will depend on your goals and risk appetite. Equity is the best for long-term goals and high-risk takers. For short-term goals, debt is the best. Investing 20% in equity and the rest in other assets would be ideal for risk-averse investors. Hence, depending on your needs, you must select your asset allocation.

The following steps can help you craft an effective mutual fund portfolio

1. Identify Your Goals– The first step towards building a mutual fund portfolio is to identify the goals you are building that portfolio for. Having goals is important because all your further decisions will be anchored to them. These goals can be anything: investing in your dream house, planning for your children’s education, investing for your retirement, etc.
2. Time Horizon– Returns from investment are usually intricately linked to the time horizon of your investment. The longer the horizon, the more risk you can take. Conversely, the shorter the horizon, the lower the level of risk.
3. Select Investment Options– Once you have identified your goals and their time horizon, you can proceed to selecting the right investment avenues for each of them.  For example, if you have a short- to medium-term time horizon you can invest in short- to medium-duration debt funds and stay away from equity. Equity funds are not suitable for short-term goals because their inherent volatility can result in a loss.
4. Diversify Your Investments– Once you have identified your goal and asset classes that are suitable for them, the next step is to diversify your investments. Further, not only should you diversify your investment across asset classes but you should also diversify your investment within the same asset. 
5. Start Investing through SIPs– Investing through the systematic investment plan (SIP) is the most important step. Execution is more important than planning, and many investors, even after doing the above three steps, postpone their decision to invest. SIPs are the best way to invest. SIPs don’t just instill discipline in investment behavior but also help you average your investment cost over time, thus reducing the impact of volatility on your returns. What’s more, you can start small SIPs and slowly increase them as you gain more confidence.
6. Review and Rebalance– Your job does not end with creating a portfolio of mutual funds; it also has to be reviewed regularly. For example, if the equity markets are getting overheated or if sectors are getting overheated, then you need to scale down exposure. The core portfolio must be monitored to check if funds are consistently underperforming the index or the peer group. You can take appropriate action to improve your portfolio returns based on the result.

Things to keep in mind when building your mutual fund portfolio

Now that you know how to build a portfolio, here are a few things you must keep in mind before starting your investing journey:

• Have an emergency fund
• Understand the market
• Risk Appetite
• Not to add to many schemes
• Fund Expenses and Fund Performances
• Do proper research and analysis
• Don’t hesitate to get help
• Be disciplined and consistent

Bottom Line

The above steps can be used as a broad framework to build your mutual fund portfolio. But remember that investing and planning for your goals is not a one-time exercise. It has to be done continuously, and you may have to revisit the above steps at different points in time.