How to build your mutual fund portfolio

To build your mutual fund (MF) portfolio, you need to follow these simple steps. However, we always advise you to take help of websites such as ours for performing complete financial planning and building your portfolio.



1)  Identifying financial goals: The process of building your MF portfolio starts with identifying your financial goals, which includes factoring in of possible rates of inflation. You would be in a better position to plan for retirement, children’s education, marriage, or buying a house, if you have a fair idea of the time that you would require to build the corpus.



2)  Risk profiling: Identifying your risk appetite is vital. You should perform the process of risk profiling to assess the optimum risk that you can take as an individual. For example, let us assume you are 30 years old and have just started your career. You can have an equity-oriented portfolio as you can afford to take risks in anticipation of higher returns. Typically, prospective investors at 30 years of age should invest higher percentage of their money in equity-oriented mutual funds. Those approaching retirement or have already retired should ideally have low equity exposure. For example, an older person would rather invest in conservative funds to preserve his/her capital whereas a person who is 50 years of age would invest only higher percentage of his/her money in conservative funds. Individuals should perform risk profiling annually as their income, expenses, and life style are subject to constant change with the passage of time. Further, over time, the individual’s liability might increase and others aspects might also change, making it imperative to perform annual risk profiling.

3)  Your objective: Your portfolio should represent your objective. If you have short-term goals, you should invest in funds that are conservative, as these funds will ensure a decent return and no loss of capital. However, if you have long-term goals, you must go for aggressive funds, as these tend to do well in the long term. Balanced funds are good for mid-to-long term.



4)  Asset allocation: This would help you diversify your portfolio risk from one particular asset class. Therefore, it is mandatory to allocate your funds in all asset classes such as real estate, gold, direct equity, mutual funds, bonds, and debt. A younger person has a longer investment horizon and hence, can afford to invest a larger portion of his/her savings in aggressive funds.



5)  Selecting fund house: You must identify fund houses that have a pedigree in financial services and provide funds with a consistent track record across all asset categories. There must be a minimum of five years of consistent returns.



6)  Fund manager: If you are targeting an actively managed fund, you are really relying upon the fund manager’s ability to pick stocks, not the fund itself. What you are really looking for in fund managers is their history, how well they have done with stocks or bonds, particularly with securities of the same type that they are investing now.



7)  Selecting the scheme from the fund house: You should take the following steps for selecting a scheme from the fund house:



a)  You might use performance as a measure to make your final list of schemes. However, also consider consistency in performance over longer tenures, including three, five, and ten years. The schemes that you select should ideally be those that have consistently exceeded their benchmarks and compare reasonably with their peers over long periods.



b)  You should know sector allocation of the funds, as it helps create a better portfolio, since two funds having the same sector investment would be highly correlated. However, while investing, the correlation between the two funds should be less, as it gives a better chance for the portfolio to perform in the bear markets too.



c)  You must identify whether the funds are invested across market capitalization or whether they limit themselves to large-cap, mid-cap or small-cap stock baskets. Some funds could also be thematic. Most financial goals are long term and therefore, it is better to invest in diversified funds that have broader mandates. Furthermore, consider the benchmarks that the funds follow. It will give you a broad sense of whether the fund is tracking a broad index such as the CNX 500 or the BSE 200. Along with these parameters, there are other parameters too such as Sharpe ratio, alpha, beta, and R-squared, which would also be helpful, but are complicated to use as a decision-making tool for a common investor.

To know more about these parameters, you can consult your advisor.



8)  Investment period: This should always match your financial goal, since one makes investments with some goals in mind, which an individual would want to achieve. One must make these investments with a holistic approach to meet one’s goals.



9)  Monitoring returns and profit booking: Monitoring your investments should be a periodic process. It should be pre-decided based on the regular intervals at which it should be monitored. Do not be tempted to make changes in the first six months or even a year. If you have followed the steps outlined above, you will not need to make short-term changes. Changing funds also involves additional charges such as exit load and others. Book profit if your investments have achieved your targeted return on investment (ROI) on per-annum basis considering the tax computation as well.


Dec ’13

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

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