How to build a robust Mutual Fund Portfolio? Key Features of Financial Planning

Step 1: Set Your Financial Goals

Start by writing down your goals with time frames. Goals can be short-term (less than 3 years), medium -term (3–7 years), or long-term (7 years or more):

• Short term: Emergency fund, vacation, buying a car.
• Medium term: Children’s education, down payment for a house.
• Long term: Retirement, wealth creation, legacy planning.

Each goal requires a different type of fund. For instance, equity funds are generally suited for long-term goals because equity markets may recover from volatility over time. Alternatively, debt or liquid funds work better for short-term needs.

Step 2: Assess Your Risk Tolerance and Time Horizon

Risk tolerance is about how much risk you are willing to take based on factors like your age, liabilities, and existing responsibilities. Time horizon, on the other hand, is how long you plan to stay invested. These factors play a part in building a mutual fund portfolio. 

Two investors can have the same goal but may need very different mutual fund portfolios because their comfort with risk is different. For instance:

• If you are a young investor who is 20 years away from retirement, you may be comfortable with a higher equity allocation. 
• If you are close to retirement, you may prefer to limit your equity exposure and focus more on relatively stable debt funds.

Step 3: Focus on Diversifying Your Portfolio

Once you have outlined your financial goals, risk tolerance, and time horizon, you can focus on asset allocation. Asset allocation helps diversify your mutual fund investments by spreading your investments across different asset classes. 

The common fund categories are listed below:

• Equity funds: Well-suited for long-term goals like wealth creation or retirement planning. Large-caps add relative stability compared to mid and small-caps, mid- and small-caps bring more potential growth (and more risk).
• Debt funds: Can be useful for short to medium goals. Liquid funds work for emergencies, while short-duration or target maturity funds suit fixed timelines.
• Hybrid funds: Combine equity and debt in one place. Based on your risk appetite, you can choose from aggressive, balanced, and conservative hybrid funds. 
• Index funds: These are low-cost options that track a market index. They provide broad diversification at minimal cost to your mutual fund portfolio.

Including a mix of equity, debt, and hybrid funds may help reduce market volatility risks as these funds invest in assets that respond differently to market changes. This can help you create a diversified mutual fund portfolio. 

Step 4: Select Mutual Funds

Within each category, choose specific schemes carefully. Here are a few things you can check:

• Performance: Look at 3–5 year returns versus benchmarks, not just recent numbers.
• Fund manager: Review the track record of the fund manager to see how they have handled different market cycles. 
• Expense ratio: Look for funds with lower expense ratios to reduce your investment expense. 
• Portfolio overlap: Avoid picking funds that hold mostly the same stocks.

Step 5: Monitor and Rebalance Periodically

A robust mutual fund portfolio is one that keeps pace with changing markets and evolving financial goals. You can follow the below tips to monitor and rebalance your MF portfolio:

• Check once a year or after major life events.
• Rebalance if your allocation shifts too much. For instance, if equity grows from 60% to 75%, consider moving some gains into debt to restore balance.
• Exit underperformers only after consistent lag over multiple years, not just one bad quarter.

You can automate reviews as well. You can use a mutual fund portfolio tracker for regular updates and a mutual fund portfolio analyzer for deeper reviews.

As a beginner, it’s common to make mistakes when building a mutual fund portfolio. Here are some common ones you must remember: 

• Investing in just one or two funds. Spread your investment across categories and asset classes to build diversify your portfolio.
• Selecting schemes based on past performance alone. Try to assess the scheme’s objective, strategy, and consistency. 
• Investing without outlining clear financial goals. 
• Selecting 10+ funds for diversification. This can lead to overdiversification, making MF portfolio analysis and tracking challenging. 
• Choosing funds based on recommendations of family members and friends. Focus on your own risk tolerance and financial goals to pick the right funds. 

Failing to monitor and review your portfolio with a mutual fund portfolio tracker. 

Building a mutual fund portfolio can feel overwhelming for a beginner. But with the right focus, you can make this task simple. Linking your financial goals to your MF investments lets you tailor your portfolio be a part of your long-term financial planning blueprint. Similarly, assessing your risk appetite and time horizon, make it easier to pick funds for your portfolio. Lastly, regular MF portfolio analysis and periodic checks using tools like a mutual fund tracker allows you can see whether your investments are still on course as you proceed through different life stages.

Disclaimers:

• An Investor Education and Awareness Initiative by Tata Mutual Fund. 
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This communication is a part of the investor education and awareness initiative of Tata Mutual Fund.