Great salaries, excellent bonuses, fairly valued markets, high interest rates - the time looks just perfect to design and put together your mutual fund portfolio.
Building a MF portfolio is akin to building and furnishing your own home:
- It depends on your financial capacity
- Your personal tastes and preferences
- Requires a lot of patience and care
Therefore, while there cannot be a model portfolio suiting everyone's needs and objectives, you can follow a few general rules to build yourself one.
Be clear of what you want
To begin with, you must decide what your financial objectives are; and how much risk you are willing to take to achieve those objectives.
The goals should be as precise as possible. For example you goals could be
Rs 50,000 to pay-off the personal loan in 2007
Rs 200,000 for children's higher education in 2012
Rs 100,000 for foreign trip in 2010
Rs 750,000 for daughter's marriage in 2015
Rs 1 crore (Rs 10 million) retirement corpus in 2020
Second, your goals must be realistic. They must be in line with your financial position and risk appetite. No point in having too ambitious or too pessimistic goals; or having goals, which require you to take undue risks.
Devote proper time and thought to planning your goals.
Done? Good, that's a major part of your job over. Once you know where you stand and where you want to go, the rest is just a matter of details.
Match each goal with the appropriate MF category
Equity markets are too volatile in the short-term, but can give good returns in the long run. Debt funds, on the other hand, give steady but low returns. Therefore, select the goals, which you will finance through equity funds and through debt funds.
Assuming your retirement is still 15 years away, a predominantly equity portfolio may be a better option.
But for your personal loan, which is payable just one year hence, debt funds will be more suitable.
And for the medium term, like your foreign trip, balanced funds may be the right answer.
Liquid funds are a nice way to park your very short-term funds.
Depending on the corpus, one could invest in an average of 4-7 funds for an equity portfolio and maybe 3-4 funds for the debt and balanced category. Too less a number of funds make your portfolio concentrated and risky. Too many, makes it unmanageable and doesn't really serve the purpose. You need to strike the right balance.
Also, while selecting the fund, study their portfolio mix and ensure that they are different. If most of them are same, then even with 6-7 funds you won't get the desired diversification.
In order to achieve diversification across asset classes, one could now look at some of the forthcoming options such as real estate fund, gold fund, international fund etc.
Build a suitable mix of equity funds
Apart from allocating your corpus in different asset classes, you need to do some allocation within the equity class. Index/Large Cap funds, Mid-cap/Small cap funds and Sector Funds are the 3 broad sub-categories in which you have to divide your corpus.
Index and Large Cap funds will deliver steady returns, which will be in line with the market performance. In the equity space, they carry lesser risk as compared to mid caps, small caps etc. About 70-80% of your corpus could be allocated to this category. They provide stability to your portfolio. Go for funds with moderate risk and consistent performance.
Your portfolio may need some kicker too. Mid-cap/Small cap funds and Sectors Funds have the potential to provide higher growth (of course with a higher risk). Be prepared for a bumpy ride; and sometimes crash landing too. A 10-20% allocation to this category may be okay. In case of a bad performance, major portion of your corpus is still relatively safe. Large caps will minimise your losses and will also bounce back quickly.
Don't forget the tax aspect
Neglecting to pay tax is bad, but tax planning is not. It can help you to minimize your tax outgo, legally.
Therefore, take care to choose the right option - dividend payout, dividend reinvestment or growth. They may help you to save unnecessary taxes. Make sure that you use the post-tax returns in your calculations. Else you may miss your target.
Having built a suitable portfolio, you need to nurture it. You have to regularly feed it with additional investments. You will have to remove the weeds (poor performing funds) periodically. And be patient. It takes time for the tree to grow. But once is has grown, it becomes strong - so you don't have to take too much care; and fruitful - it will give you returns year after year.
The author is an investment advisor and can be reached at firstname.lastname@example.org.
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