Investing in a mutual fund is a tricky business. There are so many funds available in the market that it is difficult to choose the right one. An added difficulty is to make the right portfolio of mutual funds. A portfolio is a combination of different funds that meet your objective.
The whole business of creating a portfolio becomes even more complicated because the risk taking ability of an investor changes over time. This article is about creating and balancing your mutual fund portfolio. We have identified 4 model mutual fund portfolios that cover almost the entire investing population. These include the conservative investors as well as the aggressive ones who have a high appetite for risk. This article also covers retirees who want a stable income stream during their retirement years.
Before choosing your portfolio, you need to figure out 4 criteria for yourself:
a) Your risk taking appetite
b) Tax friendliness of your instrument- i.e. how much tax you are likely to pay on your yield
c) Period of investment- it may vary from 1 year to more than a decade
d)Return expectations- your expectation may vary anywhere from 8% per annum to more than 12%.
The 4 types of mutual fund portfolios
1. Wealth Maximizer- This portfolio is for the young investor who has just joined the workforce and is in his 20s or early 30s. This investor has a high risk appetite and won’t mind losing small amounts of money as long as his investment fetches him a very good return over short to medium term. Typically, this maximizer fund comprises small and medium cap funds and a multi-cap fund to balance out any risks.
One such mutual fund that has delivered a very high yield in one year is the SBI Small and Mid Cap Fund that has topped the small cap market. It delivered an annual yield of 66%. Another notable MF is the Mirae Asset Emerging Bluechip that has yielded 23% over the past 3 years.
Please note that the mid and small cap market looks volatile now and the road ahead is bumpy. Some MFs in this category have closed down their schemes and are now accepting new SIPs with new and tougher conditions.
2. Growth builder funds- If you are looking for stable and long-term growth, then opt for those mutual funds that have invested in companies having strong brand values, and have been in business for very many years. Some of these companies belong to the Tata and Birla groups, Larsen Toubro, Asian Paints etc.
While small cap funds may have delivered a fantastic growth, the large cap market hasn’t lagged either. However, the returns from this category have not matched with its growth. The large-cap category grew 26 % in 2016 but its yield has remained low over the past 3-5 years. Some of the outstanding AMFs in this category are the Franklin India Flexi Cap, Kotak India Select Focus, and Birla Sun life Frontline Funds.
3. Stable income fund-Get the better of both the two worlds of equity and debt markets.
This fund typically comprises equity oriented balanced schemes, an ELSS fund and a short term debt fund. Investors opting for this portfolio balance growth with risk and do not depend upon one market alone. They gain when the equity markets are growing and still make money through the debt markets when stocks decline.
A good ratio in this market is 69% equity and the remaining is debt. In terms of cap percentages, 65% of your portfolio should be allocated to large cap sector, 25% to midcap and the remaining to the small cap.
A word of caution to the investor- please check the implications of the long term capital gains tax before investing in any of the above portfolios. Speak to your financial advisor.
4. Secure income- Some investors don’t want any risks but on the other hand want to get good returns as well. The Secure Income portfolio is for them and it is heavily loaded toward debt instruments ( 74%). The rest of the portfolio comprises stocks in the equity markets.
The equity related component is divided evenly between the large and mid cap stocks (45%) while the rest is allocated to the small cap segment.
There is a caveat here- debt funds are also prone to volatility. If the interest rates go up, the yields go down concomitantly. Volatility affects long-term debt instruments more than the short term ones. It is advisable that investors should opt for short term debt instruments in this portfolio.
Summing up, your portfolio must reflect your risk appetite, returns expectations, duration of investment as well as financial objectives. You should also check the tax friendliness of your portfolio. Click on the given link https://www.orowealth.com/insights/blog/different-types-of-mutual-funds/ and get yourself aware about different types of mutual funds.