5 Tips to Maintaining a Healthy Mutual Fund Portfolio
Created on 27 Oct 2023
Wraps up in 7 Min
Read by 1.2k people
Updated on 30 Oct 2023
Have you ever noticed? When you type "mutual fund" and go to your search engine's "image" section, there are photos of plants symbolising money in half of the results 🪴. The banner image of this article is a good example of this pattern. This makes one think, why plants? Are graphic designers simply out of ideas?
The thing behind applying this analogy is that mutual funds and plants have resembling qualities.
For one thing, both require time and care to grow. Like plants, mutual funds also need to be;
- watered with regular capital investments 💧,
- receive warmth from constant checkups 🌞,
- and get rid of unwanted stocks ❌.
Another similarity is that both plants and mutual funds can be unpredictable. Sometimes, despite your best efforts, your plants may not grow as well as you hoped. Likewise, your mutual funds may not perform as well as you expected.
There are ways to achieve the first set of similarities and avoid the second one.
I have created two different checklists for you, one of which is for those who are starting from scratch or are still building their MF portfolio. The following infographic lists down the essentials to tick on the first stage of investments in mutual funds. 👇
Read about all of them in detail from the article Factors to Keep in Mind While Building a Good Mutual Fund Portfolio.
Now, the second list is about…
How to Perfectly Maintain a MF Portfolio
After learning about the factors to cross-check while building a mutual fund portfolio, it's time to discuss how to maintain steady growth. What? I hope you aren't under the illusion that creating a diversified portfolio with the relevant funds would be enough.
Remember the plant analogy we discussed earlier? Along with choosing the relevant fund house, you also need to update your portfolio regularly. For doing so, several parameters need to be considered.
The most important of them all is…
Checking the NAV
A mutual fund's Net Asset Value (NAV) is the price at which one unit (share) of the fund is bought or sold. It is calculated by dividing the total value of the fund's assets by the total number of outstanding units. 👇
Let's understand this concept with the help of an example. Suppose a mutual fund scheme has the following:
- Total Assets: ₹100 lakh
- Total Liabilities: ₹10 lakh
- Total Number of Outstanding Shares: 5 lakh
On applying the formula,
NAV= 100,00,000 - 10,00,000 / 5,00,000
Hence, the mutual fund unit's price would be ₹18 as per the above figures.
NAV is an essential concept in mutual funds because it gives investors an idea of the value of their investment. It also helps investors compare different mutual funds and track their investments' performance over time.
Dive into understanding the importance of NAV in mutual funds by reading the article What is NAV?
Reforming the Portfolio
If you are a procrastinator like me, then your wardrobe must also be a mess. 😅 Now, this habit comes to bite us in the ass when we run late for an important event. And that's how our mothers get the opportunity to comment on how essential it is to clean up. On a similar note, your mutual fund portfolio also needs regular reformations.
You should check the fund's performance periodically based on your investment goals, which have been briefly discussed in the article mentioned above. If it doesn't match your expectations, you must make adjustments. This rule especially applies to investments with short-term goals. Compare the scheme's historical performance over five to ten years and check its current performance. Doing the math might help you predict the future performance.
Plus, it will also allow you to remove or include new additions, funds or stocks to your portfolio. Hence, while you are reforming your portfolio periodically, you will be ticking off this important step as well. 👇
You must be wondering why diversification is included in both the checklists, right? Well, that's the beauty of diversification: it is diversely present throughout the tenure of a mutual fund. In short, it should not be avoided.
Diversification is the process of allocating one's investments in varied ways so as to avoid exposure to a particular stock, bond, or fund. It provides protection against the sudden dip of one or more assets by providing rising or minimal returns from other investments.
Diversification is like having a cheat day in your diet. 🍕 For six days a week, you eat healthy to maintain a balanced diet. But on one day, you allow yourself to indulge in your favourite foods, even if they're not the healthiest. This way, you're not depriving yourself of what you enjoy and still staying on track with your overall health goals.
By investing in a variety of different assets, you're reducing your risk and increasing your chances of success in the long term. Even if one asset class underperforms, your other investments will help to offset your losses.
So, next time you're tempted to put all your eggs in one basket, remember that diversification is the key to a happy and healthy investment portfolio.
Now, the most crucial question is: How much diversification is enough for a mutual fund?
No fixed figure is considered an industry standard since the ideal amount of diversification for a mutual fund portfolio depends on your investment goals, risk tolerance, and time horizon. However, a good general rule of thumb is investing in at least 15-20 stocks in 4-5 mutual funds.
I know this can be a bit difficult to manage, especially if you are on a tight budget; thus, let me give you an alternative.
Here is a somewhat structured diversification rule that might help you maintain a great portfolio:
- Asset class diversification: Invest in a mix of stock funds, bond funds, and money market funds. For example, you could allocate 60% of your portfolio to stock funds, 30% to bond funds, and 10% to money market funds.
- Industry diversification: Invest in a variety of different industries, such as technology, healthcare, IT, and automotive. For example, you could allocate 20% of your portfolio to each of these four industries. To know which sectors have the highest growth potential, read the article 5 Fast Growing Industries in India.
- Fund company diversification: Invest in mutual funds from different fund companies. For example, you could invest in mutual funds from three or four different fund houses.
Adapting the Long-Term Investment Style
Mutual fund investing is the name of a long-term chess game. Instead of expecting to get rich quickly, focus on building a portfolio that will help you reach your long-term financial goals. After all, it takes time to build a successful mutual fund portfolio. Every piece you move and every investment you make paves the path to your reaching the winning strike.
You may not see the results immediately; in fact, several downfalls are bound to come in your journey. But
Don't get discouraged if you don't. Just keep investing and rebalancing your portfolio regularly, and you'll be well on your way to reaching your financial goals.
My Bonus Step for Better Returns
If you follow the above-mentioned factors, then you might be able to maintain an excellent mutual fund. Now, we are nearing the end of our checklist, and as a bonus point, I would like to introduce you to
Step Up Investments
Let me explain this pointer with a solid yet simple example.
Suppose two friends, Ravi and Priya, have started investing ₹3000 per month for 15 years in mutual funds with a 10% annual return.
Ravi: Invests ₹3000 per month for 15 years without a change.
Priya: Invests ₹3000 for the first year, then increases her investment by ₹500 annually.
Let's assume that both of them are getting a 10% annual return, then after 15 years;
Ravi: Would receive an estimated corpus of around ₹7.14 lakh
Priya: Would receive an estimated return of about ₹8.95 lakh.
Just look at the difference between the estimated return amount for both parties. That's the power of stepping up investments. 😎
You can make your calculations as per your investment goals within seconds by using the Financial Calculators by Finology. There are a variety of calculators available based on numerous needs, so let's get started. 👇
So, make this your mantra, and 👇
The Bottom Line
And you are one step closer to achieving your financial goals now. Just keep following the checklist above, and you could retire way earlier than your original plan. Then, there would only be trips to take, good food to enjoy, and comfortable calm with your loved ones. That's the kind of life a good mutual fund portfolio could help you lead, so keep at it.
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