How to Build a Mutual Fund Portfolio

Building a mutual fund portfolio requires planning and largely depends on individual preferences. There is no "one size fits all" solution and which funds to invest in will depend upon your financial goals and objectives. Hence defining your financial goals and objectives is perhaps the first and the most important step towards creating your mutual fund portfolio.

Before making any investment, have clarity on your goals, why you are investing, how much you need to invest and what is the time horizon you have to realise your goals.

Financial goals can be anything from saving for your next trip abroad, buying a house or planning your retirement. List down your financial goals and put a timeline to them to determine till when you can hold your investments.

Time given for investments to grow will decide the success or failure in achieving your decided financial goal or amount. For example if you are 30 years old and your investment objective is retirement planning, then it essentially means that you have a window of another 30 years (assuming you will retire when you are 60 years) to save and invest. The choice of mutual fund schemes in this case will greatly differ if you are 50 years and have just 10 years more to achieve your financial goal. It will also affect your risk taking capability.

Your Risk appetite also determines what kind of mutual fund portfolio you should build. Time adds to your risk-taking comfort. In the above example, at 30 years you may be more comfortable investing in high risk, high return mutual funds riding ups and downs of the markets. On the other hand, you may not be ready to take high risks and may want to stay focussed on saving your investments, if you have just 10 years to invest for your retirement.

Core and Satellite strategy

One of the most effective ways of building a mutual fund portfolio is through the Core and Satellite strategy.

Definition

A Core and Satellite strategy basically means dividing your mutual fund portfolio into two parts: core and a satellite. The objective of the core is to give your mutual fund stability while generating steady returns. The satellite part aims at investing in high risk mutual fund schemes that have the potential for giving higher returns.

What makes the Core different from the Satellite?

Core	Satellite
Forms 70-90% of the mutual fund portfolio	Should constitute the balance 10-30%
Provides stability while generating steady returns	Provides diversity and high return potential
Has low to medium risk investments	Has high risk investments
Mostly constitutes funds investing in large-cap stocks, index funds, etc.	Looks at funds investing in mid-cap or small-cap stocks, sector funds, thematic funds, etc.
Addresses long-term financial goals and time horizon	Can be used to address short-term financial objectives

Once you have created your mutual fund portfolio, it is important to review your portfolio periodically to ensure that the composition of the core and the satellite is maintained over time. You should also ensure that your portfolio is diversified and gives strong post-tax returns.

 

 

The information contained in this document is for general purposes only and not an investment advice. Readers should seek professional advice before taking any investment related decisions.

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