For income generation and wealth creation, mutual funds (MFs) have become popular investment tools. But even though MF schemes yield solid returns, investors often have a hard time choosing funds. While the market is flooded with MF schemes, it’s prudent to consider risk, returns, and other parameters when choosing a fund.
Besides, building a mutual fund portfolio that works for you is preferred over buying a single fund when it comes to MF investments. If you’re starting out in making MF investments and looking to build a mutual fund portfolio, this is the article for you. Here’s how to create a suitable MF portfolio to ensure your money is working for you.
Map your financial goals
The smartest way to create a portfolio is by tying your financial goals to your investments. Your goals can be short-term, like going on an exotic vacation/cruise, purchasing a car, etc. Or they can be long-term investment goals like buying a house, wealth creation, capital preservation, tax saving, building a retirement kitty. Once you have your investment goals in mind, you can build your portfolio to realise your aspirations.
Making a goal-based portfolio helps you make focused investments and understand how far you have come. Hence, linking goals to your portfolio will ultimately help you choose appropriate MF schemes.
Understand your risk appetite and investment horizon
Before choosing mutual funds, comprehensively map out your requirements and expectations. Since different investment instruments serve varied purposes, choose the one that works for you. For instance, some funds offer superior market-linked returns but are high on risk elements, while others extend decent returns, being more suitable for risk-averse investors.
After deciding the end goals for your investment, select a time horizon. For instance, if your goal is to build your retirement corpus, your time horizon would be 25-30 years. If you invest for such a long term, your investment will greatly benefit from the power of compounding.
However, your end goals should also align with your risk appetite. For instance, if you want returns over 12%, you should be willing to invest in moderate to high-risk funds. That’s because risk and returns go hand in hand. Here, the higher the risk, the better the chances of scoring solid returns.
Additional Read: 5 Reasons Why Your Portfolio Needs Multi-Cap Funds
Number of funds
When considering how many funds you should invest in, it’s unwise to accommodate 10-15 fund schemes in your portfolio. Investors must understand that diversification only works when you have different fund categories in your portfolio that build its core components.
Diversification- a portfolio with a mix of assets helps keep the overall portfolio return intact. If your investments witness a fall in mid-caps, they can be cushioned by the stability of large caps. Hence, a portfolio with 3-5 schemes across varying market capitalisations and asset classes is ideal.
Selection of fund
Now it’s time to select funds. Different Asset Management Companies (AMCs) can offer varying returns for the same funds’ category. This depends on the companies that the funds have parked money in and the fund manager’s expertise. Also, consider the expense ratio before investing in a fund.
The expense ratio is the expenditure incurred in managing the fund. Here, the lower the expense ratio, the higher the returns available for you as an investor. The expenses can run into lakhs in the long run because of the compounding effects.
Additional Read: All You Need to Know How To Review Your Investment Portfolio?
Over to you
Now that you’ve selected the funds, it’s time to invest a lump sum or start a SIP. Using the framework mentioned above, you can build a mutual funds portfolio that aligns with your investment objectives. To get started with goal-based investing, download the Moneyfy app today.