A mutual fund portfolio is a mix of investments in different types of mutual funds based on varied underlying assets like equity, bonds, and others. Balancing investments in different asset classes allows investors to capitalise on gains and minimise their overall risk exposure. While your MF portfolio is tailored to suit your financial objectives and risk tolerance, curating one can be difficult for beginners. To help you streamline your investment approach, this article covers what is a mutual fund portfolio, how to build a mutual fund portfolio, and how to track its performance in detail.
What is a mutual fund portfolio?
Mutual funds can be broadly classified on the basis of their asset classes, investment objectives, and structure. A mutual fund portfolio is a collection of various mutual fund investments owned by the investor. This portfolio typically includes a variety of funds picked to meet specific investment goals and risk tolerance levels. Portfolio composition is determined by factors like your age, investment horizon, and risk appetite. Investors can choose from different types of mutual funds, including equity, debt, bond, indexes, and sector-specific funds to diversify their investments and mitigate risks. For instance, you can opt for a mix of equity and debt funds to balance risks and returns or reduce sector-specific risks by investing in the tech, healthcare, and fintech sectors via different sector-specific MFs.
Composition of a mutual fund portfolio
A mutual fund portfolio is typically structured with the following elements:
- Asset Allocation: Investments are distributed across different asset classes—such as stocks, bonds, and cash—tailored to the investor's risk tolerance and objectives.
- Diversification: Risk is spread by investing in various mutual funds with unique strategies and goals.
- Risk Management: The portfolio is balanced to optimize risk and return by choosing funds that match the investor's comfort with risk.
- Long-Term Growth: Emphasis is placed on selecting funds that support wealth creation over time, aligned with the investor's time horizon.
Purpose of a Mutual Fund Portfolio
- Wealth Creation: Aims to build wealth over time by strategically investing in assets that generate returns.
- Risk Management: Diversifies investments across various assets to reduce the impact of market volatility on the portfolio.
- Income Generation: Provides regular income through dividends or interest, especially for income-focused funds.
- Goal Alignment: Tailors the portfolio to meet specific financial goals, such as retirement, education, or major life purchases.
- Liquidity Access: Allows investors to access funds relatively quickly compared to some other investment options.
- Professional Management: Leverages the expertise of fund managers who monitor and adjust the portfolio for optimal performance.
Why should you create a mutual fund portfolio?
Curating a portfolio for mutual fund investments is a smart strategy for the following reasons:
Diversification for reduced risk
Building a mutual fund portfolio allows you to spread your investment across various asset classes like equity stocks, bonds, and others, lowering the overall investment risk.
Professional management
The investment portfolios of a mutual fund are overseen by professional fund managers. Fund managers use their expertise to analyse markets, research companies, and adjust portfolios to maximise returns for investors.
Accessibility for small investors
Curating an MF portfolio allows even small investors to invest in a wide range of investments and reap the benefits of market-linked returns. In fact, you can start an SIP investment with as little as Rs. 100 per month.
Convenience and simplicity
Managing individual investments in a portfolio can be challenging for those with limited knowledge and time. However, when you invest in a mutual fund scheme, the fund manager takes care of asset selection, market monitoring, and performance tracking responsibilities.
Liquidity and transparency
MFs are liquidity investment avenues. You can easily buy or redeem your unit on any business day based on their NAV (Net Asset Value) for the day to meet urgent cash flow requirements. Since NAV is updated daily, you have complete transparency about the value of your investment.
How to build a mutual fund portfolio?
Here’s a step-by-step run-down on how to build a mutual fund portfolio:
Set your goals and risk tolerance
Outline your financial goals - be it buying a home, higher education, or retirement planning. Next, evaluate your risk appetite. This involves understanding how much risk you are willing to take on.
Research and choose funds
With your goals and risk profile in mind, consider various types of mutual funds including equity, hybrid, debt, and balanced funds. Carefully evaluate factors like the fund’s past performance, expense ratio, and the fund manager’s credentials.
Diversify your investments
Avoid putting all your eggs into one basket. Diversify your mutual fund portfolio with different types of funds and sectors to hedge volatility associated with a single fund type/sector. For instance, you can curate a mix of domestic equity funds and international mutual funds or a mix of sector-specific funds and broad-market index funds.
Allocate your assets
Based on your investment objective, risk profile, and time horizon, decide on how much you wish to allocate to different asset classes in your portfolio. Young investors can opt for a higher equity exposure for potentially better returns over time, while those nearing retirement can benefit from the stability of debt asset investments.
Regularly review and rebalance
Periodically reviewing and rebalancing your mutual fund portfolio keeps in tune with changing market trends and your evolving financial goals. Rebalancing helps maintain the original asset allocation plan which may have shifted due to varied sectoral performances.
Factors to consider before building a mutual fund portfolio
Financial goals
Your mutual fund portfolio needs to align with your investment goals. In other words, you need to select assets that can deliver risk-balanced returns needed to achieve your goals. For instance, stable investments may be better suited for short-term goals like planning a vacation, while a mix of equity and bond investments may work better for long-term goals like retirement planning.
Risk tolerance
Evaluating your comfort level with risk helps select funds that best match your risk profile. Consider factors like age, income, and your general temperament towards risk. Depending on how much risk you can tolerate, your portfolio may be conservative, aggressive, or balanced.
Diversification
Spread your investment across various assets to mitigate investment risks. Curating a diversified mutual fund portfolio with exposure to different types of securities will help you weather market swings.
Expense ratios and fees
Expense ratio is the annual fund management charges levied by the AMU. Carefully considering exit loads, transaction charges, and the expense ratio associated with your MF portfolio is important to avoid excessive fees from lowering your overall earnings.
Building a diversified mutual fund portfolio
Diversification is essential for effective risk management in a mutual fund portfolio. By allocating investments across various sectors and market capitalisations, investors can balance the potential for growth with stability.
Spreading funds among asset classes—such as stocks, bonds, and cash—serves as a protective measure against market volatility. Different sectors, like technology, healthcare, and finance, tend to perform uniquely, so investing across these areas helps reduce the impact of sector-specific downturns.
Incorporating companies of varying sizes (large, mid, and small-cap) combines the steadiness of larger firms with the growth potential of smaller ones. Equities offer higher growth but can be volatile, while bonds add stability with modest returns. By blending these assets, investors can aim for steady growth while managing risk.
How to monitor mutual fund portfolio performance?
Acknowledging the meaning of a mutual fund portfolio is not enough, you also need to monitor its performance to ensure it aligns with your goals and objectives. Here’s a guide on effectively monitoring your MF portfolio’s performance:
- Review regularly: Scheduling quarterly or semi-annual reviews can help effectively track your portfolio’s performance. While periodic reviews can help you understand if rebalancing is required vis-a-vis market and sectoral performance and trends.
- Compare with benchmarks: Relevant benchmarks can help you assess the performance of your MF portfolio. Comparing your portfolio’s performance against market indices and comparable mutual funds helps you gauge how well your portfolio is performing.
- Assess returns: Assess risk-adjusted returns from the portfolio. Weigh the fund’s volatility against the average returns over time.
Conclusion
In summation, curating a mutual fund portfolio is essential for investors to secure inflation-beating returns that meet their investment objectives and risk profiles. The tips mentioned above can help investors curate a diversified portfolio, track portfolio performance, and rebalance whenever needed.
If you are looking to explore different mutual fund schemes and curate a portfolio, you can do so on the Bajaj Finserv Mutual Funds Platform. This platform makes it super convenient to compare over 1000 mutual funds, spreading across sectors and asset classes. Additionally, with digital tools like Step-Up SIP Calculators, SIP Calculators, and Lump-Sum Calculators, you can curate your desired MF portfolio based on your preferred contribution frequency and estimated returns.
