Creating an ideal Mutual Fund portfolio
An ideal mutual fund portfolio must have a superior risk-reward ratio and should have the funds which help you to achieve your financial goals.
Recession fear stemming from economic slowdown due to the coronavirus pandemic has sparked the need to reshuffle investment portfolios among many people. Todays' generation is spoilt for choice as they benefit from choosing from among different asset classes. The increasing number of funds in each category has also led to confusion and difficulty in choosing the right mutual fund. Besides, todays' much-informed investors do not take the risk of parking all their money in one single fund. Instead, they adopt the portfolio approach, thus, trying to explore the way to create an ideal mutual fund portfolio.
Portfolio Approach to Mutual Funds
There is much ambiguity regarding the definition of an ideal mutual fund portfolio as the choice of portfolio depends on age, income, financial goals and risk tolerance. There is an inherent need for investors to diversify the portfolio to ensure that they do not limit themselves to the benefits of one scheme or fund alone. Diversifying the mutual fund portfolio means allocating the earnings to many good schemes and thus benefit from different fund management styles. If you look at fund performance closely, it is very clear that consistency in portfolio performance is the product of bringing different styles and approaches to the portfolio. Simultaneously, it should not be over-diversification because over-diversification is equally or more dangerous than having no diversification at all.
Deciding a Mutual Fund Portfolio
The portfolio approach to mutual funds involves balancing and maintaining the risk of the portfolio. While you may choose one kind of mutual fund (like debt fund) for its stable and predictable nature, the other kind (like equity funds) can be chosen for a high risk-return profile. The idea behind adopting this kind of portfolio strategy is to balance the unpredictability while looking for opportunities to earn from the market. However, if you are looking for higher returns and are willing to take higher risk, you may choose to invest in different categories of equity funds.
There is a lot of research involved in choosing the right number and kind of mutual funds in the market. With hundreds of mutual fund schemes available, enlisting the right number of mutual funds to meet our financial goals can be an arduous task. Some people may choose to invest in 10-12 mutual funds, while others may not go beyond opting for two to three schemes that they deem the best.
Asset Allocation is the key
More than the number of mutual funds in your portfolio, it is the type of the mutual funds that matters. For some people, the asset allocation is in 80:20 proportion, i.e., 80 per cent of the funds allocated to equity while the rest invested in debt schemes. Some others may choose the 50-50 equity to debt ratio as a measure of seeking lesser risk and more stability in returns. By investing in multiple similar funds, you end up investing in the same kinds of stocks enlisted in different mutual funds. The best way is to allocate between different categories of the funds depending on your risk tolerance, investment goals and time horizon. If you wish to stay invested for not more than five years and also want safety of your money, a debt mutual fund might make the best choice. For those whose investment time horizon is longer, let’s say more than five years with a higher risk appetite, equity mutual funds can help. If you are still unsure of where to put your money, you can invest in index funds that promise returns at par with the market performance. Invest when the market is low and exit when the market is high.
Diversifying your mutual fund portfolio
Portfolio diversification is a must. This will help avoid risk and ensure optimal returns over a period. Many people unsure of how mutual funds work end up investing in two or more funds of the same category. However, this may mean exposing you to the same kind of risk. Avoid investing in the same asset category to diversify your portfolio. However, excess of diversification does not help as multiple funds may erode the effect of the top performing funds.
While the performance of a mutual fund over the past five or ten years do matter, they must not be the ultimate yardstick to measure their performance. The trick is to check the composition of a mutual fund to gauge its future performance and evaluate its risk reward ratio.
Customised curated portfolio
Some of the renowned mutual fund distributors offer a curated set of mutual funds portfolios to cater to the need of different investors. These funds are carefully chosen on the various parameters and offer a good choice to the investors who are struggling to create a mutual fund portfolio.
Investing in mutual funds is always a good choice, but choosing the right mutual fund seems to be a tough task for many. To get good returns on your mutual fund investment, it is important to have the right set of funds in your portfolio. These funds should balance the need for asset allocation and diversification while maintaining the number of funds within a manageable range. You can choose to take the help of your financial advisor or choose from the readymade packs of mutual fund portfolio available with your broker as per your investment objective.
Disclaimer:ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. AMFI Regn. No.: ARN-0845. We are distributors for Mutual funds. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein mentioned are solely for informational and educational purpose.