Building a mutual fund portfolio is like building a house. Although various plans, equipment, and building materials exist, every structure has a few fundamental components. To ensure your mutual fund investments help you reach your financial objectives, they must be subject to time-bound monitoring.
Check how your mutual fund schemes have done compared to their peers and benchmarks while evaluating them. React appropriately to underperformance because it will occur occasionally.
Here is how you can build and review your mutual fund portfolio:
1. Plan your financial goal
It is the beginning of all your investments. You must establish specific life goals and assign a monetary value to them since, no matter how quickly you run, it will only be worthwhile if you know where you’re going.
Financial objectives range widely and depend significantly on your circumstances. Regardless of how different the scenario is, you will eventually need to look at mutual funds to help you address the problem. Of course, there are other financial tools, but they are more flexible than mutual funds (or ETFs).
2. Regulate your asset allocation
Asset allocation, which is your desired mix of large, mid, and small-cap index funds, debt funds, international funds, money market funds, and gold funds, forms the basis of your portfolio.
It establishes your portfolio’s overall risk level, which should align with your risk tolerance, and is the first stage in creating a diversified portfolio. Because diverse asset classes, industries, and securities don’t move in lockstep, diversification is adequate.
You should choose the asset class based on your objective and risk tolerance. An equity-heavy portfolio would be a wise choice if, for example, your retirement is 15 years away. But debt funds are more appropriate if you have a personal loan that needs repayment in just one year.
3. Know your risk appetite
Before choosing mutual funds, draft your goals and expectations in detail. Because different investment vehicles have varied uses, pick the appropriate investment instrument. For instance, some funds offer decent returns and are better suited to risk-averse investors, whereas other funds may offer strong market-linked returns but involve greater risk.
But your ultimate objectives should also match your risk tolerance. For instance, you should be prepared to invest in moderate- to high-risk funds if you desire returns of over 12%. It is so because risk and return are mutually exclusive. Here, the likelihood of earning good returns increases with risk.
After you have decided what your investment’s ultimate aims are, select a time horizon. For instance, if building your retirement corpus is your goal, your time frame would be 25–30 years. If you make such a significant long-term commitment, the power of compounding can significantly aid your investment.
4. Choose the right fund
It is now the time to select funds. Different Asset Management Companies (AMCs) could give varying returns for the same fund category. It depends on the companies that the funds have invested in and the fund manager’s expertise. Take the expense ratio into consideration as well before investing in a fund.
The expense ratio serves as a representation of the fund management costs. In this scenario, the smaller the expenditure ratio, the higher returns are available to you as an investment. The prices could eventually reach lakhs due to compounding effects.
Depending on your investment amount, you might invest in an estimate of 6-7 funds for an equity portfolio and 2-3 for other categories like balanced, debt, or gold. Of course, the mix will change depending on your investment horizon and risk tolerance.
5. Monitoring your funds
You must rebalance your portfolio if the asset allocation has changed. Sell the increasing asset class and put the money into an under-represented one. You can also increase exposure to the underrepresented asset class to rebalance the portfolio.
A frequent assessment makes it easier to spot someone who habitually performs poorly and, if necessary, to take corrective action. If there is a change in the organisation, management, or strategy, or if you anticipate a material decline in the fund’s prospects, you should consider selling the investment.
You must work hard and put your best foot forward. Having your mutual fund portfolio more relevant and successful for your goals takes a little extra work.