Building Your First Mutual Fund Portfolio: A Step-by-Step Guide for Beginners

Your risk tolerance is the level of risk you are comfortable taking when investing in mutual funds. Factors like your age, financial liabilities, and existing savings can impact your comfort with investment risks. Understanding your risk tolerance capacity can help you decide what type of funds fit into your mutual fund portfolio. For instance:

• If you have a low risk tolerance, you may prefer investing in debt funds.

• If you have a moderate risk tolerance, you may prefer balanced or hybrid funds, which invest in both equity and debt assets.

• If you have a high-risk tolerance, you may prefer equity funds.

Every mutual fund scheme carries a Risk-o-meter, which indicates its risk level. Always review this before making a choice.

If you’re building a mutual fund portfolio as a beginner, the first question you must ask yourself is this: “Why am I investing?”

• Do you want to save for a family trip next year?

• Build a fund for your child’s higher education?

• Create a retirement corpus for financial security?

Your investment goals define the structure of your mutual fund  portfolio. With clearly defined goals, you can decide the investment amount, the time horizon, and other important aspects of investing. Moreover, by aligning goals with investments, you can tag each mutual fund to a specific financial purpose.

Here’s an illustrative example of how investment approaches can differ based on goal type and time horizon:

Disclaimer: This table is for illustration only. It is not a recommendation. Past performance may or may not be sustained in the future. Investors should consult their financial advisors if in doubt about whether the product is suitable for them.

Once you know your risk profile and goals, you can shortlist funds to build a balanced mutual fund portfolio. When selecting funds for your portfolio, consider the following factors:

• Fund House & AUM

• Past Performance of the fund over the last 1, 3, and 5 years (Note: past performance may or may not be sustained in the future)

• Fund Manager’s track record and style

• Costs such as expense ratio and exit load

• Taxation rules and implications

• Liquidity of the scheme 

Asset allocation refers to dividing your portfolio across different asset classes. It is key to building a balanced mutual fund portfolio. A diversified mutual fund portfolio is one where investments are spread across:

• Equity funds → for potential long-term growth.

• Debt funds → for relative stability.

• Hybrid funds → for balance and risk spread.

Building a diversified mutual fund portfolio with allocations across asset classes helps spread the investment risk since asset classes perform differently based on changing market conditions.

The final step in building a mutual fund portfolio is to monitor, review, and rebalance your investments. As a beginner, you should understand that building a portfolio is not a one-time activity. It requires regular check-ins:

• Review your mutual fund portfolio every 6 months to a year to see if your investments are still aligned with your goals. 

• Track and monitor the performance of your funds using a portfolio analyser for mutual funds. 

• Rebalance if allocations drift away from your set balance.

• If a fund consistently underperforms its benchmark or peers over a prolonged period, you may consider replacing it.

• A good mutual fund portfolio is usually diversified across categories and asset classes instead of relying on just one or two funds.

• Avoid over-diversification; holding 10+ schemes can make mutual fund portfolio analysis and tracking unnecessarily complex.

• Use a mutual fund screener to evaluate schemes based on objectives, risk, and consistency rather than past performance alone.

• Rely on your own financial goals and risk profile instead of choosing funds based only on suggestions from friends or family.

• Keep your SIP portfolio disciplined and aligned with your time horizon instead of stopping midway due to market fluctuations.

• Use a mutual fund portfolio tracker to monitor performance and rebalance when needed.

• Keep the number of schemes manageable. Investing in too many schemes can make mutual fund portfolio management, reviews and adjustments challenging.

As a beginner, you might need guidance on both how to build your first mutual fund portfolio as well as how to invest in mutual funds online. Here’s a simple step-by-step guide on how to invest in MFs:

• Complete KYC – Ensure you are KYC compliant through Aadhaar, PAN, and other required details.

• Choose a platform – You can invest directly through the AMC’s website, through a registrar, or via online marketplaces.

• Select the investment mode – Decide whether you want to invest through a Systematic Investment Plan (SIP) or as a lump sum.

• Set up bank mandate – Register your bank account for auto-debit or online transfers.

• Make your first investment – Purchase the chosen fund and keep track of it using a mutual fund portfolio tracker.

Your first mutual fund portfolio does not need to be complicated. Start small, stay consistent, and use simple tools like a mutual fund screener, portfolio analyser, and portfolio tracker to keep your investments organised. A regular SIP helps build discipline, while periodic reviews ensure your portfolio stays aligned with your goals. What matters most is not chasing trends, but creating a structure that grows with you.

• An Investor Education and Awareness Initiative by Tata Mutual Fund. 

• To know more about KYC documentation requirements and procedure for change of address, phone number, bank details, etc., please visit: https://www.tatamutualfund.com/deshkarenivesh 

• Please deal only with registered Mutual Funds, details of which can be verified on the SEBI website under ‘Intermediaries / Market infrastructure institutions.’  

• All complaints regarding Tata Mutual Fund may be directed to service@tataamc.com and/or https://scores.sebi.gov.in/ (SEBI SCORES portal) and/or https://smartodr.in/login 

• Nomination is advisable for all folios opened by an individual, especially with sole holding, as it facilitates an easy transmission process.  

• This communication is a part of the investor education and awareness initiative of Tata Mutual Fund.