A portfolio of funds is a set of investments made in various mutual fund schemes that are in line with your financial goals and risk appetite. We have covered the following in this article:
Investing your hard-earned money is arguably one of the most critical financial decisions you will ever make. Stocks, bonds, fixed deposits or mutual funds; the thought of investing will put your mind into a dilemma. Mutual fund investors find it particularly challenging to choose from the vast array of available funds. This becomes even more complicated when an investor has to build a portfolio of funds.
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. 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 essential to understand the concept of rebalancing, which 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. Many investors invest in a couple of funds and hold onto the units regardless of their performance. This is usually counterproductive for a range of reasons:
So, building a portfolio that fits in with your goals and regularly monitoring it can make a lot of difference to your returns.
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 realising your aspirations.
A goal-based portfolio is always better than investing randomly. Goals act as a yardstick to indicate how far you have been successful in your investment journey. 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.
We have come across many investors who loosen their purse strings at 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 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.
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 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 finalised, you can look at various schemes available across different fund houses. Consider your age, income and financial goals before zeroing in on a programme. A word of caution – be wary of the ‘one size fits all’ approach.
Investing in Mutual Funds is made paperless and hassle-free at ClearTax. Using the following steps, you can start your investment journey:
Step 1: Log on to cleartax.in.
Step 2: Enter all the requested details.
Step 3: Get your e-KYC done in less than 5 minutes.
Step 4: Invest in the most suitable mutual fund amongst the hand-picked mutual funds.