There are more than 40 plus AMC’s currently in the country
constituting more than 1,000 mutual fund schemes.
With such heavy numbers, filtering becomes a herculean task.
There is of course no such thing as the ‘perfect mutual fund
portfolio’ or the ‘best mutual fund portfolio’.
But you always need a ‘personalized mutual fund portfolio’
without which both your money and time in mutual funds is merely wasted.
There are several important points that you need to consider
with serious thought if you have to have a meaningful experience with mutual
funds that includes decent returns.
Risk Profile
Risk profile is one of the most important factors to
consider while building a mutual fund portfolio if not the most.
Your risk profile would include several points like the
following but not restricted to:
- Age
- Current expenses
- Goal
- Time Horizon
- Emergency Funds
- Ongoing EMI’s
- Current Debt levels
- Stability of Income etc.
It is more beneficial and healthy to have a professional
arrive at your risk profile rather than doing it yourself since we all have
certain biases that could play against it.
We tend to overplay our risk taking capabilities and
underplay our reality.
An outside neutral perspective is the closest you will get
to see where you truly stand rather than where you ‘wish to think’ you stand.
A realistic risk profile analysis saves a lot of time,
energy and even money for any short term redemptions can cause both exit load
charges as well as taxes.
In many cases, investors have ventured into mutual funds without
any sufficient assessment or hand holding and concluded mutual funds is not a
healthy investment option because of their experience.
Two individuals with the same age, job designation, income,
etc. can yet have different risk profiles if one has a running emi whereas the
other does not.
This is precisely why you need a personalized mutual fund
portfolio based on your risk profile concluded by a professional.
Another important point to take into account with a risk
profile is that it can change over a period of time, you can have more/less loans
with time or an increase in salary or more expenses with changes in your
personal life (having a kid) etc.
This does not mean you should definitely make changes to
your mutual fund portfolio based on life changes but yes, it is better to be
aware of the effect of these changes on your portfolio.
Additional reading: Click Here to read about mutual fund mistakes you should avoid making
Goals
Goals in terms of time horizon can be roughly divided as:
- Immediate
- Pressing
- Short term
- Medium term &
- Long Term
Further they can be prioritized by wants and needs, wants
are something you can postpone or even avoid completely but needs you cannot.
Now based on both the time horizon as well as your
priorities, your mutual fund portfolio should be accordingly bifurcated.
Even if you do not have any goals to begin with, retirement
is a goal we all share so that is a goal you can assign certain mutual fund
schemes to.
Later on you can add more goals as and when time passes and
you are more accustomed to mutual fund investing.
Segregation of schemes and goals not only helps you stay
disciplined but also makes sure your goals are never compromised.
Professional Advice
In a highly populated country like ours, opinions will
always be aplenty and mutual funds are no exception to that.
It is one thing to receive unsolicited advice from family
and relatives but with mutual funds recent trend suggests that investors also
seek advice from strangers on social media who are no more qualified than them
for mutual fund ‘advice’.
This never bodes well since the advice you receive, whether
solicited or unsolicited has no accountability or qualification and you end up
moving in and out of schemes based on differing advices you receive which in
turn means higher taxes and exit load charges.
Mutual fund advice is not a one- time thing, it is:
- Prior to investing
- While invested and
- How to redeem
So do the simple and sound thing of reaching out to a
distributor/adviser for better handling of your mutual fund portfolio.
Be it wealth or health, only let the qualified professionals
enlighten you.
Emergency Funds
Never invest in
mutual funds if you have not kept aside a minimum of 6 months of fixed
expenses.
Not abiding by this will affect both your mutual fund
portfolio as well as your overall financial health.
Imagine you do not plan diligently, one of the result of
which is you not having an emergency fund.
Now if you have an emergency and touch your mutual fund
portfolio, all your prior planning and financial goals go for a toss.
With such behavior, it will not be possible for you to ever
achieve financial stability nor realize your goals.
Additional reading: Click Here to read why you should review your mutual fund portfolio yearly
Avoid star ratings
When building a mutual fund portfolio, avoid star ratings at
all costs.
Star ratings are a recent phenomenon that has caught up
quite quickly, mostly via the online route.
The most visible and obvious issue with them is how
generalized they are, whereas ones portfolio should be personalized.
Another issue is the how the various mutual fund schemes are
allotted these star ratings, more often than not recent returns on the higher
side means a fund will have a higher rating.
Another point is studying a fund, not all schemes of a
category will be functioning in the same manner despite the mandate
restrictions.
Therefore comparison with respect to star ratings is a
futile exercise.
Not all funds are about high returns, conservative funds for
example are more about stability and yet are rated based on their ability to
garner high returns which should not be the case.
Constant Review
Before you make your mutual fund portfolio, you should ask
yourself if you are in a position to constantly review your portfolio on a
periodic basis.
As previously mentioned, we often tend to overestimate our
own analysis as we are biased.
We are living during times of abundant information but not
enough knowledge, therefore investors who invest based on internet searches
often end up with a huge portfolio.
This is because they end up chasing recent returns and since
the ‘top performer’ often changes, they pick them all due to FOMO.
This results with an over diversified portfolio which not
only drains their returns but also leaves them stuck with a huge portfolio
which they have no clue how to manage.
If you invest in a mutual fund scheme then you should know
the reason for doing so, the goal attached and have both the expertise as well
as the time to review it periodically.
Choice of Funds
This should ideally be the last step in creating a mutual
fund portfolio, unfortunately most investors make this their first step.
Only when you have considered the above points should you
move towards picking your mutual fund schemes.
It becomes a lot easier with the filtering process of
schemes once the other steps have been executed efficiently.
A mutual fund portfolio is more about the process rather
than returns no matter how ironic it sounds.
The choice of funds do make a massive difference in your
overall experience therefore following the process, taking the services of an
expert and understanding the fund style is very important.
If not then you would have to suffer the consequences in the
form of exit load, taxes, losing out on compounding effect, time, etc .
Having a mutual fund portfolio and a strong mutual fund
portfolio are two different things.
You need someone who has both the time and the professional
technicalities to track your portfolio on a yearly basis and guide you from
time to time with regards to any development for your mutual fund portfolio and
if any action needs to be taken from your side.
If not then it is better to stick to traditional means of
savings like fixed deposits in which even if you may not gain much but at least
you would be aware with what is going on.
For portfolio enquiries, email us with your doubts at info@themutualfundguide.com
