Mutual Fund Portfolio
Over the years, mutual fund schemes have become a preferred investment option for all types of investors, whether seasoned or first-time. A significant reason for the popularity of mutual funds is the freedom to create a portfolio that aligns with the investor’s risk tolerance, financial objectives, and investment horizon. However, to make the right portfolio, you need to make efforts. You must use the right strategy, designs and tools to create the desired portfolio. Moreover, an ideal portfolio should withstand market fluctuations and work well for your needs.
Here is a quick guide to creating mutual fund portfolios:
What is a mutual fund portfolio?
A mutual fund scheme pools money from different investors and invests the funds in various securities, such as stocks, bonds, etc. The total holdings of the mutual fund are known as the mutual fund portfolio. When you invest in a mutual fund scheme, you buy a share of the pooled fund that represents your part of the ownership in the fund and the income it generates.
What are the different factors to consider when building a mutual fund portfolio?
Here are some factors to consider that can help you build an effective mutual fund portfolio.
- Assess your risk tolerance: Risk tolerance refers to the amount of market risk or fluctuation (ups and downs). If you are a high-risk taker, you can handle intense market fluctuations that can cause a drop in your asset value. Alternatively, if you are a low-risk taker, you get anxious about market volatility or a decline in asset value. For instance, if you invest Rs. 40,000 in stocks for two years and get highly anxious when your stock value falls by 10% in three months, you likely have a low-risk tolerance. That implies as an investor; you should invest in securities that carry a low risk, such as bonds, fixed deposits or gold ETFs. If you are a high-risk taker, you can consider investing in equity or stocks. You can build your mutual fund portfolio that aligns with your risk appetite.
- Decide your asset allocation: Once you understand your risk tolerance, you can make wise decisions regarding asset allocation in your mutual fund portfolio. Your risk appetite will determine your portfolio asset mix – stocks, bonds and cash. If you are a high-risk taker, you can build an aggressive portfolio comprising stocks. The objective of such portfolios is to create wealth in the long run. If you are a conservative or a low-risk investor, your mutual fund portfolio will chiefly consist of debt securities and restricted investment in equity. The goal of such portfolios is capital preservation. If you are a moderate risk taker, you can create a balanced portfolio of stocks, bonds and cash. Typically, the higher the risk tolerance, the greater is the portfolio allocation to stocks relative to bonds and cash.
- Focus on diversification: An important strategy to remember when creating a mutual fund portfolio is diversification. Diversification is a risk management strategy that allocates assets across various financial securities, industries, etc. However, the central point is your focal investment option, and the other assets represent small parts of your portfolio. For instance, if you are a high taker and want to invest in stocks, it is advisable to create a portfolio that works on the concept of core and satellite. Your core is large-cap stock funds, which comprise the most significant portion of your portfolio. Around the core, you create satellite investments, representing a smaller portfolio of your mutual fund portfolio. Satellite assets include mid-cap stocks, small-cap stocks, fixed income bonds, money market funds, sector funds, foreign stocks and more.
- Choose mutual funds wisely: Now that you know your risk tolerance, asset allocation and diversification preferences, find a fund scheme that fits your criteria. You can choose your mutual fund scheme by assessing the historical returns, comparing the fund performance with the benchmark, checking the fund manager’s experience and vision, and more. Apart from this, it is also essential to consider the fees involved in mutual fund management. That is also known as the expense ratio of the mutual fund scheme. The higher the expense ratio of a mutual fund scheme, the lower the returns. Hence, before investing, choose a mutual fund scheme with a low expense ratio.
Overall, following these tips will help you create a sound mutual fund portfolio. However, one tip that most financial experts recommend is using the age-related formula to decide the portfolio asset allocation. You have to subtract your age from 100, and the answer is your stock composition. For instance, if you are 60 years old, your portfolio should ideally include 60% stocks and 40% other assets like bonds, money market funds, etc.
You can use advanced, data-driven platforms, like Alphaniti, to create a mutual fund portfolio. Alphaniti uses statistical models and mathematical calculations, backed by research and free from human bias, allowing you to make wise investment choices. Alphaniti provides you with value-added tools and in-depth market insights, supporting efficient and effective decision making.