Do all investments give equal returns? No! Do all investments carry the same risk? No, again. So, how can you reduce the uncertainties of your investment? This can be done by building a diversified portfolio of different investments. These can be stocks, bonds, mutual funds, commodities, money market instruments, etc.
Mutual funds are pooled investment vehicles wherein asset management companies raise capital through different investors and invest in the stock market on your behalf. Mutual funds always have a central theme. When we talk about a mutual fund portfolio, it simply means a combination of funds with different themes to diversify your investments.
How to build and select a winning portfolio?
Step – 1: Understand your investor profile
There are 3 primary things you should consider: your financial goals, risk tolerance, and time horizon.
- Financial goals:
- Your financial goals can be for the short-term, medium-term, or long-term
- A short-term investment is generally for 1-3 years. For example, to travel to your dream destination
- A medium-term investment is for 3-7 years. This can be for buying a car or paying off a loan taken by you
- A long-term investment is for more than 7 years. Your goals can be to build a house or finance your children’s education
- Risk tolerance:
- Your risk tolerance can be low, medium, or high
- Debt funds carry low risk. Hence, they tend to suit a risk-averse investor
- Equity funds carry a higher risk. So, as your risk appetite increases, you can increase your equity exposure
- Time horizon:
- You have a low risk tolerance in the short term
- You can bear moderate risk in the medium term and high risk in the long term
Striking the right balance between these 3 is the primary purpose of a portfolio.
Step – 2: Select the right mutual fund categories
There are broadly 3 mutual fund categories, namely equity funds, debt funds, hybrid funds.
- Equity funds:
- They carry the highest risk
- They invest more than 65% corpus in the stock market
- Debt funds:
- Debt funds are the least risky
- They invest mainly in debt instruments
- Hybrid funds:
- These funds are moderately risky
- They invest in both debt and equity instruments in such proportions to reduce the overall risk without losing attractive returns
|Types of funds
● Equity Linked Savings Scheme (ELSS)
● Dividend Yield
|● Low Duration
● Medium Duration
● Ultra Short Duration
● Credit Risk
Step – 3: Pick the right mutual fund
Considering the above steps, you can easily identify which mutual funds suit your risk category.
- It is advisable for a risk-averse investor to go for debt funds. The main purpose for them is the safety of their funds
- An investor who can tolerate moderate risk could include hybrid funds in their portfolio
- For an investor having a high-risk appetite, investing their capital in equity funds could help them better
A winning mutual fund portfolio is the one that matches your risk profile and gives you the best possible returns. Such funds appoint an expert manager who takes care of the market research and investment decisions. So, once you have figured the right combination of mutual funds, you need not worry about your returns.
It is important to note that no one can promise sure shot returns in the stock market. There is always an element of risk involved.