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A portfolio of funds is a set of investments made in various mutual fund schemes according to your financial goals and risk appetite. Having a portfolio allows you to monitor, analyze and manage your investments in an effective way.

This article covers the following:

  1. Why portfolio building is good for me?
  2. How to tie your portfolio to your financial goals?
  3. How many funds should I have in a portfolio?
  4. How do I choose the funds for my portfolio?
  5. How to invest in Mutual Funds?

 

1. Why portfolio building is good for me?

Investing your hard earned money is arguably one of the most critical financial decisions you will ever make. Stocks or bonds, fixed deposits or mutual funds; the thought of investing usually clouds the mind with a plethora of such options. Mutual fund investors find it particularly difficult to choose from the wide array of funds that are available. This becomes even more complicated when an investor has to build a portfolio of funds.

 

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If you invest in mutual funds, then building a portfolio will only do you good. Exercising due-diligence before investing is usually not enough to ensure that the investment performs as expected. Regular monitoring and managing the investments is the key to ensure that your money is working for you while you sleep. A portfolio allows you to do just that – look at your overall financial standing, buy or sell units if they are not in sync with your expectations and avoid terrible losses.

At this juncture, it becomes important to understand the concept of re-balancing. Rebalancing involves bringing back the skewed asset allocations to the original target asset allocation. One would realign the weights of the assets of the portfolio. You may periodically sell units of assets whose weight has increased in the portfolio and buy units of those assets whose proportion has reduced owing to market movements.

Suppose the original target asset allocation in equity:debt was 50:50%. Due to a recent market rally, the stocks performed well and the stock weighting increased to 60%. Now the investor may sell units of equity and buy debt instruments to bring the portfolio allocations back to the original allocation. There are many investors who invest in a couple of funds and hold onto the units regardless of their performance. This is usually counterproductive for a range of reasons:

a. No diversification & enhanced risk– All the eggs are being kept in one or two baskets.
b. Opportunity Loss – Different sectors of the market outperform the others at different times and the sectors these couple of funds are invested in might be experiencing a downslide.

So, building a portfolio that fits in with your goals and regularly monitoring it can make a lot of difference to your returns.

 

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2. How to tie your portfolio to your financial goals?

A portfolio should be created by mapping the financial goals to your investments. Financial goals are the dreams which you aspire to achieve and invest accordingly. Goals can be short-term or long-term. Buying a car or going on an exotic vacation tend to be short-term goals. While wealth creation, tax saving, capital preservation and retirement corpus are some of the most common long-term investment goals. Once your investment objectives are in place, the portfolio can be built to ensure that you are on track to realizing your aspirations.

A goal-based portfolio is always better than investing in a random fashion. Goals act as a yardstick to indicate how far you have been successful in your investment activity. These help in focussed investing and prevent any digressions and waste of time. Most of the times investment is guided by fund performance. But not every fund is meant for everyone. If the fund outperformed the benchmark but didn’t meet your target rate of return, then it’s similar to non-performance on the whole. Thus, linking goals to the portfolio provide clarity and choice of appropriate products.
 

3. How many funds should I have in a portfolio?

We have come across many investors who loosen their purse strings at the first sight of the next ‘shiny thing’ in the investment market. Such investors usually end up with 10-15 different fund schemes in their portfolio. This happens due to the lack of a plan. Investors need to understand the principle of diversification in order to keep fund returns in line with their expectations. It is accomplished by having various fund categories in the portfolio which would help in building the core components of the portfolio.

Diversification is based on the basic premise of not to put all your eggs in one basket. You may know that different securities react differently to a particular market situation. A rise in equity component may lead to a fall in the debt component or vice-versa. At any point in time, with diversification as a tool, a mix of assets in the portfolio enables cushioning to keep the overall portfolio return intact. It can be viewed as a situation wherein a fall in mid-caps may be cushioned by the stability of large-caps.

A portfolio with 3-5 mutual fund schemes across different market caps and/or asset classes is ideal. Remember, like most things in life – too much diversification leads to lack of control. Minimalistic is the way to go.
 

4. How do I choose the funds for my portfolio?

As is true for any investment, choosing funds for your portfolio should be based on your investment goals, risk tolerance, and duration of the investment. A diversified portfolio is usually what investors strive for keeping their objectives in focus and inherent risks in check. You can start by identifying the category of funds that you want to invest in. Once the category is finalized, you can look at various schemes available across different fund houses. Consider your age, income and financial goals before zeroing in on a scheme. A word of caution – be wary of the ‘one size fits all’ approach.
 

5. How to Invest in Mutual Funds?

Investing in Mutual Funds is made paperless and hassle-free at ClearTax.
Using the following steps, you can start your investment journey:

Step 1: Sign in at cleartax.in
Step 2: Enter your personal details regarding the amount of investment and period of investment
Step 3: Get your e-KYC done in less than 5 minutes
Step 4: Invest in your favorite mutual fund from amongst the hand-picked mutual funds
 

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