There are so many options in mutual funds that most of the investors are confused which one is right for them. There is no such thing as a perfect mutual fund portfolio.
There are so many options in mutual funds that most of the investors are confused which one is right for them. There is no such thing as a perfect mutual fund portfolio. All mutual fund portfolios are designed according to different needs and market scenario. It’s just that when buying mutual funds, investors would rely on advisors who recommend which one is right for them.
It is fine as financial advisors are well aware of all categories of mutual funds and understand which product is right for an investor. But sometimes advisors also try to push mutual funds to generate their incentive. So any investor who wants to purchase or reboot their funds should understand following factors.
The very essential thing for investors is to decide what you are investing for and what is your goal. Don’t come up with a simple word like ‘saving’. The term ‘saving’ is used very generally by many individuals. That saving could be for retirement money, rainy day money or to fund their children’s education or marriage. The best way to manage investment is to have separate portfolio for each financial goal or one can club similar goals and have portfolios for them, like retirement portfolio, child’s education fees or their marriage.
Know the goal
Once we know the goal, we have precise answer to questions like how much money may we need to fulfill that goal, approximately when we may need it and what returns can we be targeting. Let us take an example. We are looking for `20 lakh for our child’s education. This goal is precise and we know that we will need this amount in X period. This helps in making investment decision easy.
For better understanding, we will pick two common goals. One is for retirement in 20 years which is long-term, and one would be medium term for child’s education, say in seven years. With goals fixed, now we move on to asset allocation for each.
We all know that for long-term goals, higher allocation of equity is suggested as it helps beat inflation. In long term, all the volatility generated by equity is also ironed out. For the short term, it is better to stay with debt and for medium term we would recommend combination of equity and debt. So, we would suggest for retirement 70% of equity and 30% of debt while for medium term child’s education, it would have to be 50% equity and 50% debt.
Going into details, we need to find suitable fund categories. If someone is investing under `10,000 per month then he should divide 70% of that amount into three categories—large cap (index or active), midcap and small cap. I would not suggest putting all the amount into one category. For debt, natural choice would be EPF and PPF. Suppose someone is investing `30,000 or above per month, I would recommend two of large cap and multi cap while one fund of mid-cap and small-cap. For tax saving, equity linked saving scheme can be replaced with one large cap.
For child’s education, we would avoid provident fund due to lock-in period and would opt for one large or multi cap fund and one short duration fund. As time comes nearer to our goals, we would switch equity into safer debt instrument gradually as medium-term goal is now becoming short-term goal.
If one is looking to build decent and well-diversified portfolio, do not just go by star ratings. It requires planning and we don’t suggest going by past performance alone but stick with funds delivering consistent returns across all market cycles. And reliable fund houses.
(The writer is director & COO,