Table of Contents

Table of Contents

How to Build a Mutual Fund Portfolio

How to Build a Mutual Fund Portfolio

No one wants to lose their hard-earned money. But unfortunately, most retail investors lose their hard-earned money in stock markets. The primary reason for these losses is running after quick profits, blindly trusting tips and recommendations, and not having the right knowledge. Investing wisely is more important than investing, for financial success.

But a huge section of these loss-making investors does not have time to learn. A good section of people in this category can’t commit a definite, regular, and periodic time to learn. As a result, due to lack of knowledge, they make losses. There could be two possible solutions to this problem –

  • Those who want to learn could enrol themselves into top 5 stock market courses in India, which are available in a recorded format. This will ensure that, people get the right knowledge about investment and stock selection and learn at their own pace.
  • Those who don’t want to learn or have no time to learn could find the solution in mutual funds. These provide a balanced approach for beginners with comparatively lesser hassles. Rather than you take the decision where to invest what amount of money, a dedicated, expert person takes those decisions for you.

In this blog, we’ll guide you through the basics of building a practical, and safe mutual fund portfolio tailored for beginner investors.

What are Mutual Funds?

Mutual funds are a popular investment instrument. They function on the idea of pooling money from various investors, both big and small. This collected pooled money is then invested into different assets to get returns in them. These asset combinations consist of diversified portfolios of stocks, bonds, or other securities. Such a diversification reduces risks in the investment, making mutual funds an excellent and ideal option for beginners to start off. To learn more about such diversifications, you could consider enrolling in stock market courses online free with certificate.

Types of Mutual Funds

  1. Equity Funds: These mutual funds primarily invest in stocks and categorised based on market capitalisation. There are different types, such as large-cap, mid-cap, and small-cap funds.
  2. Debt Funds: These mutual funds are ideal for investors seeking fixed income. Money in these mutual funds is invested in government securities, corporate bonds, or liquid funds.
  3. Hybrid Funds: These mutual funds are a mix of equity and debt mutual funds. They offer a balanced approach for those who neither want to be a risk loving investor, nor a risk averse investor. Examples of such mutual funds include balanced funds and monthly income plans (MIPs).

Setting Financial Goals

Before you start your SIP in any of mutual funds, you must first try to define your financial goals. Before making any investment, we must think about why we are making an investment and how much risk are we willing to take in this investment. Are we saving for a dream vacation here or planning for our child’s education?

Unless we have a solid answer of these two questions, there is no point of making an investment. Having knowledge of your goals helps in selecting the right mutual funds for your mutual fund portfolio.

Types of Mutual Fund Investments

Equity Funds: These mutual fund investments are considered riskier. On the flip side, they have higher potential returns. Good Mutual fund portfolios often include a healthy mix of Large-cap, Mid-cap, and Small-cap funds, depending on how aggressive the mutual fund scheme is. Most stock market free webinars recommend investing in these funds.

Debt Funds: These mutual fund investments are ideal for investors who don’t want to take much risk. They want to get similar or better returns than a usual FD but don’t want their investment capital to fluctuate much. These mutual funds invest into safer assets such as government securities, corporate bonds, and liquid funds. These assets are common choices for the fund manager for achieving stable returns.

Hybrid Funds: These mutual funds are ideal investment choice for those who seek a balanced return on their investments. For them balanced funds and monthly income plans (MIPs) are excellent options in the category of hybrid mutual funds.

Research and Selection Process

No one should blindly start an SIP in any type of mutual fund after they’ve figured out the risk and goal. A thorough research for the schemes available for that category of mutual fund for getting the best returns is a must. You can consider the following factors to select the best mutual fund scheme for yourself:

  1. Assessing Past Performance

One must look at the historical performance of the mutual fund and compare it benchmark it follows. You wouldn’t want to invest in a mutual fund which is not able to beat its benchmark consistently.

  1. Fund Manager Analysis

You would want your money to be managed by a skilled fund manager and not someone who has failed to deliver. One should research the fund manager’s track record to ensure that their investment strategy aligns with your investment goals.

  1. Expense Ratio Considerations

Expense ratio is the fee charged to the investors by the fund. You would want this ratio to be lower if you’re investing for long-term. Also, one should note that they should not compromise with the return just for the sake of a lower expense ratio.

  1. AUM

AUM or Asset under management is the amount of money that is actively managed by the fund house for that scheme of the mutual fund. You wouldn’t want this amount to be smaller.

  1. Exit Load

Exit load could be best described as the charges which are deducted from the investment when it is withdrawn. This percentage should be as low as possible in the mutual fund scheme. In some schemes it could also be zero.

Note: To research, compare and evaluate these parameters for a certain scheme of several mutual funds you could use the data provided on Value Research platform.

Portfolio Construction Strategies

You could develop your mutual fund portfolio by adopting any one of the following strategies:

  1. Available Schemes: This strategy involves a core of well-established funds complemented by satellite holdings for diversification.
  2. Create your own distribution: Diversify across different asset classes like equity, debt, and gold to spread risk.

Even if you’re investing in a mutual fund, you must periodically review and adjust your mutual fund portfolio to maintain the desired asset allocation. Rebalancing is necessary even when you’re investing in mutual funds.

Mutual funds also provide the benefit of saving tax through ELSS (Equity Linked Saving Scheme). Even if someone is holding stocks investment in these mutual funds is a wise decision.

Should you do an SIP or a lump sum investment?

In a SIP or Systematic Investment Plans (SIPs) you get the liberty of starting small with periodic investments, while lump sum investments depend on putting a handsome amount based on market timing. When done with right approach and psychology, one can unlock the power of compounding in both methods.

Risks and Challenges

You must never forget even if you are balancing the risk with diversification offered by a mutual fund, the risk doesn’t vanish completely. You must always do research over mutual funds before investing and regularly monitor your mutual fund portfolio.

It is important to remember that building a mutual fund portfolio is a step-by-step process. You must first understand your goals, research wisely, and regularly review your mutual fund portfolio. Even if your mutual funds invest in the best penny stocks, you can’t ignore the value of research on the stocks the scheme invests into. Only then the power of compounding will work in your mutual fund portfolio.

Although, if you’re passionate to learn, you could on your investing journey today by exploring the best stock market courses in Delhi, or a google search of stock market institutes near me. Making money in stock markets is not easy, but with right knowledge, psychology, and approach you could do that with ease.

Our blogs are made for educational purposes only, and we do not provide investment recommendations. We are not SEBI-registered advisors and do not accept cryptocurrency payments. We present publicly available facts and data, not favoring any company.

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