How to construct an investment portfolio with mutual funds

Ascertaining your individual financial situation and goals is the first task in constructing a portfolio. Important items to consider are age, financial goals, how much time you have to grow your investments, as well as amount of capital to invest and future income needs.

1.?????Asset allocation mix

While constructing a portfolio, asset allocation mix (i.e. the mix of various assets including equity, debt, gold, etc.) is considered as one of the key determinants of the portfolio’s performance, in terms of risk & return. A suitable asset allocation is typically based on one’s investment horizon and risk appetite. Generally, longer the investment horizon and higher the risk appetite, higher would be the allocation to equity. The actual asset allocation mix depends on individual cases.

2.?????Your temperament and risk tolerance

A second factor to consider is your temperament and risk tolerance. Are you willing to risk some money for the possibility of greater returns? Everyone would like to reap high returns year after year, but if you can’t sleep at night when your investments take a short-term drop, chances are the high returns from those kinds of assets are not worth the stress. Willingness to take the risk is quite different from capacity to take the risk.

For example, for a 5+ year investment horizon, one can select a large cap or Sensex / Nifty Index fund and one small/mid-cap equity fund or diversified flexicap/ multicap funds that invest in large, mid and small cap stocks in varying proportions based on the fund manager’s views and future outlook. Additionally, one can have exposure to an international equity fund, thereby helping diversify one’s portfolio. For the debt allocation, one can add liquid fund and short-term/ medium term debt funds. Some exposure to Commodities/ Gold fund could also be considered. For tax saving, you can look at ELSS funds. Ensure that you are investing in DIRECT plans (no commissions) of the schemes as it has lower expense ratio than REGULAR plans (includes commissions).

Understanding your current situation, your future needs for capital, and your risk tolerance will determine how your investments should be allocated among different asset classes. The possibility of greater returns comes at the expense of greater risk of losses (a principle known as the risk/return tradeoff) – you don’t want to eliminate risk so much as optimize it for your unique condition and style. For example, the young person who does not require income now from his investments can afford to take greater risks in the quest for higher growth on portfolio. On the other hand, the person nearing retirement needs to focus on protecting assets and drawing income from these assets in a tax-efficient manner.

3.?????Rolling return performance

When selecting funds, one needs to analyse rolling return performance over a suitable period. This along with studying its performance vis-à-vis benchmark indices (like Sensex, Nifty, etc.) and peer group would indicate consistency across time frames and market cycles. Additionally, you can consider the fund’s AUM and period of existence.

Generally, the more risk you can bear, the more aggressive your portfolio will be, devoting a larger portion to equities and less to bonds and other fixed-income securities. Conversely, the less risk you can absorb, the more conservative your portfolio will be.

Once the portfolio is constructed, it is very vital to re-assess the portfolio and re-balance as required.

Overall, a well-diversified portfolio is your best bet for consistent long-term growth of your investments. It protects your assets from the risks of large declines and structural changes in the economy over time. Monitor the efficacy of your portfolio, adjust when necessary, and you will considerably increase your chances of long-term financial success.

We, at Amigos Finserv, factor in all the above parameters, along with our experience with varied number of individuals and families with different financial situations to provide the financial advice suitable for your needs. To know more about our fee-only services, drop an inquiry here.

Disclaimer: A mutual fund scheme is NOT a DEPOSIT product and is not an obligation of, or guaranteed, or insured by the mutual fund or its AMC. Due to the nature of the underlying investments, the returns or the potential returns of a mutual fund product cannot be guaranteed. Historical performance, when presented, is purely for reference purposes and is not a guarantee of future results.

Mutual Funds are subject to market risk. Please read all Scheme related documents carefully before investing.