With the passage of time, humans have become smart enough, especially with their financial decisions. Over the last few years, they have realized the power of having a diversified mutual fund portfolio and incorporated them into their wealth-building strategies.

You might have heard the concept that a person’s music playlist tells a lot about his/her character or personality and so does their portfolio about their financial goals and understandings. You heard it right. When we prefer things in our lives specifically curated for us then why should our portfolio be any different?

Selecting funds through Google research or an expert recommendation seems like a smart move. However, if you can relate, it looks the same as buying stuff from your nearest store just based on its appearance. It might look perfect on the mannequin, but when you try the same on yourself, it might drag down your personality.

In this blog, we will be discussing how you can thoughtfully build a mutual fund portfolio that aligns with your long-term financial goals. Continue reading to know more about the same.

What is a Mutual Fund Portfolio?

Before we dive into the nuances of building a portfolio, let’s just understand what a mutual fund portfolio is. It is a collection of multiple types of mutual funds that an investor invests in.  

Going ahead, different mutual funds invest in different asset classes such as stocks, debts, bonds, gold, and whatnot. Moreover, they are differentiated on the basis of categories like equity funds, index funds, multi-cap funds, sectoral funds, and more. Each and every fund comes with its own set of risks and rewards. An investor must choose carefully after considering his/her risk tolerance, investment horizon, and financial goals for optimal performance.

A portfolio’s success depends on the overall performance of all the underlying funds. This is where the concept of diversification comes into play. It helps in minimizing the risk and most importantly, losses. 

How to build a successful Mutual Fund Portfolio?

You require a mutual fund portfolio that truly aligns with your future financial goals whether long-term or short-term. It requires thoughtful research, careful planning, and hand-picking funds to build such a portfolio that can outperform the benchmark. Make sure they are also in sync with your investment objectives, risk tolerance, and tax situation.

While there is no single perfect way to curate a successful fund portfolio, however, there are some universal principles that you can follow while selecting funds for your portfolio. Listed below are a few steps that you need to understand for the same.

1. Decide your financial objectives:

The foremost step in creating an ideal portfolio is having a clear understanding of your financial goals. The most effective way to portfolio building is to link your investments with your financial goals. 

Did you know that writing your goals clearly enhances your chances of achieving them? You can either set a short-term goal like buying a car or a long-term goal like retirement or child marriage. After understanding the investment objective, calculate and evaluate the financial value you will need to pursue these life-stage goals.

2. Evaluate your risk tolerance:

For the next step in building a mutual fund portfolio, you will need to determine the risk you can easily tolerate. When it comes to money, you must take utmost care and be honest with yourself to protect the same. If you choose to invest beyond your risk capacity in anticipation of greater profits, your portfolio might be irreparably damaged.

For example, investors who play safe or have a conservative tolerance for risk prefer to invest in debt rather than equity. Therefore it is necessary to understand your personal risk capacity so that you can make well-informed decisions while building your portfolio. Furthermore, a Systematic Investment Plan (SIP) is the most convenient way that you can explore to leverage the benefits of averaging over time to minimize the chances of losing a hefty amount of money.

3. Analyze other financial factors:

Another crucial factor you need to consider at the time of portfolio planning is examining and evaluating major economic factors happening around you. Going ahead, it would be helpful if you keep in mind the latest news of global events, market conditions, tax regimes, and interest rate scenarios.

Global economic factors like inflation, changes in administration, and disputes on imports/exports directly affect the financial market, which in turn also impacts your fund’s return. Thus, it becomes important to diversify your portfolio in such a manner so that it can reap financial benefits in the current as well as in future economic setup.

4. Know your investment horizon:

Next, you also need to figure out the investment horizon for which you want to hold your investment. Before starting your financial journey you must be well aware of the financial objectives for which you are investing. 

Therefore it is important that you include funds that are suitable for your short-term goals like vacation or house renovation, mid-term goals such as buying a car, or long-term goals like retirement planning or a child’s education. 

5. Determine the asset allocation:

Determining the asset allocation is critical in creating an ideal mutual fund portfolio. A particular combination of small-cap, mid-cap, and large-cap Indian funds, debt funds, money market funds, and gold funds helps you to fetch the expected returns.

Make sure you allocate assets on the basis of your financial objectives, risk tolerance, and other important factors to build a diversified portfolio. Diversification actually works because each and every asset class does not move in the same direction. 

Moving ahead, multiple factors play a role in deciding the appropriate mix of securities for your portfolio. Choosing equity-focused funds might not be a good choice in the short term, however, they are best for long-term investments. Debt funds, on the contrary, provide steady but reduced returns.

6. Choose suitable mutual funds:

Picking up the right number of mutual funds is the most underrated step in mutual fund portfolio planning. If you invest in a small number of funds, it might make your portfolio risky and concentrated, while on the other hand, if you choose too many, your portfolio becomes difficult to manage or does not really serve its purpose. 

Also, at the time of fund selection, make sure you choose different types of mutual funds to achieve the desired diversification. Depending on the amount of investment, you can choose 6 to 7 equity-focused funds and 2 to 3 funds for other categories like debt, gold, and more. However, it’s not a fixed number, it may vary depending on your risk tolerance and investment horizon.

Your main goal should be to generate enough returns so that your funds can easily beat the relevant benchmark of each asset class. 

7. Rebalancing and Monitoring:

Last but not least, regular monitoring and rebalancing is one of the most crucial steps in portfolio creation. The way exercise routine and disciplined diet matter to your physical health, the same way a thoughtful rebalancing strategy is important to your financial well-being.

Rebalancing your portfolio to its target allocation is crucial. Aim to do this at least twice a year. However, consider rebalancing sooner if there’s a significant shift in your portfolio’s value or a major change in your life situation. This helps maintain alignment with your goals. Moreover, if you find rebalancing your portfolio challenging, you can always take help from well established financial service providers like Wealth Redefine.

Common mistakes you should avoid while building a Mutual Fund Portfolio.

Here is a list of some most common mistakes that new investors tend to make. Continue reading to learn about them so that you can protect yourself from making these mistakes.

• The fund’s past performance does not guarantee that it will continue on the same path in the future. Therefore, it is always advised to go for funds that have generated consistent returns in the past 3 to 5 years.
• During the market downturn, most newbie investors tend to stop their investments. On the other hand, experienced and wise investors choose to invest more during such times as they get more units at a cheaper price.
• The fund choice should depend on your specific circumstances and not on the recommendations from family and friends.
• If you think that your income is not high enough to start investing, then I think you forgot the concept of compounding you might have learned in the eighth standard. You can start small and increase your contribution with an increment in salary to enjoy the compounding benefits later in your life.
• Defining the goals before investing can help you select the best funds that align with your requirements.
• If you have started investing for the long term, then you must ignore the short-term market fluctuations, however, you can monitor frequently and try to rebalance when you feel the need. 

Conclusion

Investing in mutual funds is one of the best and most practical ways to grow your wealth over time and achieve financial independence. Investors find mutual funds investing an attractive option as it facilitates benefits in the form of diversification, better returns, less risk, and more. 

While wrapping up the blog, it can be said that building a mutual fund portfolio is a smart investment option to achieve financial goals in India. After understanding the basics of mutual funds investment and following the steps on how to build a strong portfolio, you are well on your way to securing financial independence.

This blog is a starting point for your investment journey. Always conduct your own research and consult a financial advisor if necessary before making any investment decisions. Happy investing!