How to Build a Good Mutual Fund Portfolio?

Do you know what a Multi-Purpose Vehicle (MPV) is? An MPV is a vehicle with various seats for people of all ages, body types, and numbers. There are spacious couch-like seats for adults to sit and enjoy, small ones with seat belts for children to be confined securely, and comfy rear seats to accommodate the frail bodies of old-age citizens. In the world of investments, mutual funds are like an MPV. 🚘

Wondering how? Mutual Funds (MF) are investment vehicles that pool capital from various investors and invest in a variety of asset classes like stocks, securities, and bonds. The investors involved are a chaotic mix of individuals with both high & low-risk appetites, large & small investment principal amounts, and varying goals. Thus, it has something for everyone, just like an MPV.

However, before the fund managers devise the right strategy to bring good returns, the investors- including you, dear reader, should conduct their due diligence.

From choosing the right mutual fund to making multiple calculations, there are many things you need to keep in mind. But don’t sweat! I will teach you the basics of building and maintaining a good mutual fund portfolio that could assist you in generating bountiful returns.

Get your notepad and start checking the boxes off to build a large corpus that will fuel your dreams and wants.

Pointers to Check While Creating a Mutual Fund Portfolio

Without further ado, let’s begin.

Investment Goals:

Before making an investment, the first thing to do is take your time and plan what you want to do with the corpus generated. This matter might seem trivial to some people. Still, it's of utmost importance as your objective will help you devise the investment's principal amount, risk tolerance, and time duration.

For example, if you're saving for retirement, you'll want to invest in funds with a long-term track record of outperforming the market. Hence, your asset allocation also depends on the investment goals.

Doing this tiny exercise will take little time and is easier to achieve. After all, we have a scenario fixed in our minds to spend money on. For me, it's travelling the world. ✈️ So, give it a good thought.

Risk Tolerance

Many factors are developed depending on the amount of risk appetite you have. For high-risk funds, the possibility of earning higher returns increases; for low-risk ones, lower returns are expected.

If you have the appetite to take on a few fluctuations in your investments, you can invest in equity-based MFs. On the other hand, if you can't risk your investment and would like a more conservative approach of small but fixed returns, then debt MFs could be a better choice.

So, take a peek inside your priorities and set your tolerance straight. If you need an easy alternative, then check out the Financial Appetite feature at Recipe by Finology. You will be able to get your risk appetite sorted within minutes.

Find the Relevant Mutual Fund

Now, this step is a bit tricky as choosing the "right" one is always difficult, whether deciding what to have at dinner or choosing a life partner. (Too real? Sorry! 🫢)

On the same note, there are 44 registered mutual funds companies that provide around 1,453 schemes to invest in. Some are reputable options with promising returns, while others are growing slowly year after year. First, you must carry out the factors mentioned above to find the relevant mutual fund. Deciding your risk appetite and investment objectives will help you screen out the unlikely options among the crowd.

Next, you should look at a fund's past performance before investing in it. However, it's important to remember that past performance does not guarantee future results.

Diversification

You must have heard the idiom "Never put all your eggs in one basket", right?  
Suppose you are a dare-devil kind of investor with a huge risk appetite. So, you have invested in only equity MFs that promise huge returns but also face major fluctuations. One day, the market crashes, turning the greens in your MF portfolio to red. ❌

In such a scenario, you would not only lose a big chunk of invested capital but your goals would also be derailed, increasing the number of years in your investment plan.

To avoid such drastic events, diversify your MF portfolio. Diversification can help spread risk and reduce the impact of poor-performing assets. So, remember to include various asset classes such as equities, bonds, securities, etc. There is no harm in keeping a backup's backup, right?

Although there is no guarantee of growth in investing, some asset classes and funds give more confidence. Here is a list of the best mutual funds in 2023. Give it a go and invest based on your strategy and research.

Fund House & Fund Manager’s Performance

Fund houses, aka Asset Management Companies (AMC), are the organisations that invest the investor’s pooled-in money to various asset classes. On the same note, the fund manager is the one responsible for implementing the fund's strategy. They also keep a keen eye on the trade activities of the mutual fund and indulge in research for other investment decisions.
 
The experience and track record of the fund house and manager are important. Based on the investment philosophy of the fund manager and the reputation of the AMC, you would be able to check whether the strategy aligns with your goals or not.

Many investors skip this particular step, thinking that the fund manager chosen must have been someone reliable and experienced. Though this is mostly true, being extra careful doesn't hurt anyone. 🙃

Direct or Regular Plan

Mutual fund schemes are bifurcated into two sections:

• Direct Plans: These plans allow investors to put their money directly into the various mutual fund schemes without the presence of a third party, aka the distributor or agent. It has a lower expense ratio with the absence of a distribution fee.
• Regular Plans: These plans are the ones where investors pool their money through distributors/agents and pay an additional expense ratio.

The money one pays for regular plans helps them save time handling the hassle of investing themselves. On the other hand, direct plans are suited for those who know mutual fund investments and market risk. They are not too good a choice for beginners. So, choose carefully by observing your knowledge of the field. Don’t shy away from a little expense if you need assistance. It’s not wrong to ask for help when needed, right? 😅

The Bottom Line

By following the tips in this article, you can build a strong mutual fund portfolio that will help you reach your financial goals. Mutual fund investing is a long-term game. With time and effort, you can achieve your financial dreams. So, be patient and disciplined.

*Disclaimer: The stocks and companies discussed above aren't a recommendation from Insider by Finology and shall not be construed as a replacement for professional advice. Consult a professional or conduct the necessary research before making investment decisions.