What is a mutual fund portfolio?
A mutual fund portfolio is the collection of schemes across different fund houses and asset classes that help in meeting investment objectives. It is built keeping in mind an investor’s risk profile, goals and objectives.
How does an investor go about building his mutual fund portfolio?
The starting point for an investor looking to build a portfolio is to first list down his goals and objectives. For example, there could be short- term goals like paying for a child’s school or college admission one year down the line, spending on an international vacation three years down the line, marriage of children 10 years later and planning for retirement. Once this is done, an investor needs to assess his risk appetite toward various asset classes like equity, fixed income and gold. While equity could potentially offer higher returns, it comes with higher risk and volatility, while fixed income could offer stable returns. Based on risk profile, an investor can do an asset allocation, which is dividing the portfolio across the above mentioned asset class. So typically an investor with a high-risk appetite can have 60% in equity, 30% in fixed income and 10% in gold, while a retiree or conservative investor can allocate 75% to fixed income, 15% to equity and 10% in gold.
How do you choose mutual fund schemes?
Once the asset allocation is established, an investor has to choose mutual fund schemes which will work for the chosen asset allocation. There are more than 40 mutual fund houses with a number of schemes available making it important to choose correctly. Investors need to look at things like investment style, past record, expense ratio, portfolios holdings while zeroing in on a scheme. For example, a portfolio can consist of a large-cap fund, mid-cap fund, sectoral fund, medium duration debt fund, and a gold fund. A conservative investor could have a portfolio consisting of a balanced advantage fund, ultra short term fund, dynamic bond fund and a gold fund and so on. Investors can put lump sum money or use a staggered method to allocate to a mutual fund scheme over a period of time.
Why is portfolio monitoring necessary?
Portfolio monitoring is essential as markets are dynamic and scenarios change regularly. By monitoring the portfolio, you may spot issues early in some schemes and make the required corrections, like shifting from one poorly-performing fund to another. Similarly, you might wish to rebalance your portfolio in favour of debt if you have reached your goal or lower exposure to risky investments if the economy is deteriorating.
