- Creating a random Mutual Fund Portfolio is never going to be a good idea.
- Your mutual fund portfolio should be optimized in such a way that it maximizes your returns for a particular level of risk.
- And to minimize your risk for a target level of returns.
- To build a portfolio mutual fund is a great way as it provides the best diversification, long-term wealth creation, and professional management. The biggest question is ‘How to create a mutual fund portfolio’? You have to start by keeping in mind your goals.
6 steps that you need to follow:-
1. Start off with your Goals in View
- Goals are basically dreams that can be quantified.
- For example, retiring comfortably is a dream but the goal is to put a monetary value. If once you have your retirement corpus and tenure in your front, the next step will be designing a portfolio that can meet these goals.
- And the same case is with the education of your child. It is a great investment plan and also requires planning for in terms of the corpus and the liquidity at different milestones.
- Also, there are medium-term goals such as managing the margin money for your home loan or for a foreign holiday trip. This can be the point where you start investing in mutual funds.
2. Based on these Goals, Design a Mutual Fund Portfolio
- You must have an idea of how much your goals will cost at future dates. Also, you must have an idea about the returns from the goals. The table below shows the following matrix:-
|Goals||Target Corpus||Invested in||CAGR(Compound Annual Growth Rate)|
|Retirement||Rs2cr in 20 years||Equity Funds||14%||Rs15,194|
|Child Education||Rs1cr in 15 years||Equity Funds||14%||Rs16,317|
|Home loan margin||Rs10 lakh in 4 years||Debt Funds||8%||Rs17,629|
|Foreign Holiday||Rs3 lakh in 3 years||Debt Funds||8%||Rs7,352|
|Total SIP Monthly||Rs.56,492|
The investor now needs to spread his investments across equity saving funds and debt funds as above with a monthly allocation of Rs56,492 to be able to achieve his long- and medium-term goals. At the macro level, this is the way to do mutual fund asset allocation. Then, you get into the mutual fund specifics.
3. Breaking up your Mutual Fund Portfolio into Core and Satellite
The core portfolio consists of low-risk steady performers. Investment and satellite schemes are aimed to earn a higher return. You may not hold them for long periods of time. Thematic funds or those that follow differentiated plans or those that work well in some and not all markets. Such funds fall under the category of satellite schemes. Typically, satellite schemes are riskier than core funds.
- What do we all mean by the core and satellite approach to mutual fund portfolio creation? As we have seen above that the goal allocation needs a certain amount as SIP each month. This should be in the form of a monthly commitment, and one has to make this a core portfolio.
- Here, the main focus is not about chances or booking profits. Moreover, the main aim is to match goals with investments while keep reviewing and rebalancing on a regular basis. The satellite portfolio is more of an opportunity portfolio.
- For example, if you are able to create a monthly surplus as per the above-stated goals. Then this can go into opportunistic ideas such as higher risk debt funds, sectoral and thematic funds, etc.
- Another example of satellite allocation is when you receive an annual bonus, capital gains, or a lump sum inflow. Use our Lump-sum Calculator to ascertain your gains.
Either way, be clear not to disrupt your core portfolio in any manner.
4. Your Risk Tolerance is more Important than Risk Appetite
There are differences between risk appetite and risk tolerance. Risk tolerance is more realistic. It is basically based on
- income level,
- family commitments, etc.
The mutual fund portfolio should be designed with your risk tolerance in mind. For example, the sector fund may be a good product, but if your age is 50 years and up to the neck with commitments, you may not have the risk tolerance for it.
5. Create a Mix of Fund Categories
- Several fund investments are a trade-off between risk and returns. This is why you need always to assess the fund on the basis of returns and also risk-adjusted measures such as Sharpe and Treynor ratios.
- If the fund manager is producing a 2% higher return with a 30% greater standard deviation, then it is not meant for you.
- However, the core portfolio, talk to your financial advisor and see how best you can make a mix.
- The mutual fund that invests in Government-Security may be default-free but Mutual Funds Performance could take a hit if rates are moving up.
- The best long-term wealth producer may be a multi-cap fund and not a large-cap fund.
6. Constantly Review and Rebalance your Mutual Fund Portfolio
- If a mutual fund portfolio has been built, it should never be left inactive. Your core portfolio should be regularly reviewed based on whether it is in sync with your goals and the usual milestones.
- Even the focus portfolio can be altered if you are invested in products that have not worked for you. In your core portfolio, you have determined percentages.
- If it is moving away from your goals, it calls for rebalancing.
- For the satellite funds, you must review periodically based on the developing macros and industry developments.
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