‘Can you suggest two or three funds to start SIPs in? Do I own the right funds?’ These are now common queries from investors writing in to bl.Portfolio. They go to show that many investors think of the DIY (Do-It-Yourself) route as the default option to build a mutual fund portfolio.

The mushrooming of user-friendly online platforms has led many folks to think that DIY investing is a breeze. All they need to do is to log on, start SIPs in a few funds and forget about them until they need the money. But good results from DIY investing don’t come this easily. To be a successful DIY investor, you need to consciously build a portfolio that suits your needs, monitor it over time and take steps to ensure it is delivering. Here are some essentials to DIY investing.

A concrete set of goals

India today has 42 mutual fund houses offering over 1,600 schemes in 36 different categories. Therefore, the first step in sensible DIY investing is to decide which category of funds you should own. This requires you to ask yourself why you want to invest in mutual funds.

If you are keen to save up money for a holiday in a year’s time, you shouldn’t be starting equity SIPs, which require a minimum 5-7 year holding to pay off. If retiring in 20 years’ time is your dream, you shouldn’t even be looking at low-return money market or gold funds as options. So before embarking on your fund search, map out your financial goals with timelines. You can then create distinct portfolios towards each of your goals. For smaller goals, investing in a single fund may suffice. For bigger ones, you may need three or four funds that represent different asset classes.

Building goal-based portfolios provides you with automatic answers to two other questions — what returns you can expect (the category decides this) and when you should exit your funds (when you reach your goal).

Research and resources

Once you have a fix on the category that suits you, you can get down to selecting the right funds.

Today, there are a number of fund rating services that give you readymade returns and rankings. BL Portfolio also publishes such rankings every week. But use such rankings as your starting point and not as your final shortlist. Most star ratings apply quantitative filters on past returns to rank funds. But market conditions, the fund manager’s ability to navigate tough times and portfolio changes will decide future returns. Give these factors equal weight. Look for a fund’s ability to deliver consistent returns over a 7-10 year market cycle, be it in equity or debt.

After picking funds confidently on their own, some investors get cold feet when confronted with spells of poor returns. This can happen when you don’t take the fund’s risk profile or your own risk appetite into account. To gauge this, rolling returns are more useful than trailing returns. Rolling return analyses capture a fund’s returns over hundreds of periods, so that you can gauge the best and worst-case returns from it across different market conditions. A DIY investor looking at trailing returns alone may be tempted to buy an equity fund with a 12 per cent CAGR in the last five years, over a balanced advantage fund with 9 per cent. But if the equity fund lost 38 per cent in its worst year, while the balanced fund lost 19 per cent, wouldn’t he change his mind?

Rolling returns enable you to gauge possible losses on your funds when markets are hostile and help you mentally prepare for it. Subscriptions to real-time databases such as Valueresearchonline.com or Ace Equity can help you with such analysis.

Risk strategy

DIY investors who begin with well-thought-out, goal-based portfolios can be led astray by greed and fear. Investors who start SIPs in bull markets may stop them when a bear phase sets in. Winning funds can become concentrated portfolio weights. They may churn portfolios too often to chase winners.

To control such wealth-destroying impulses, set risk management rules at the outset. Sticking to a fixed allocation between assets (say, 60 per cent in equities, 30 per cent in debt, and 10 per cent in gold) smooths out your returns and prompts you to periodically re-balance. Single-fund exposure limits (say, at 10 per cent) avoid over-dependence on one style or manager. Signing up for SIPs without an end-date can keep them going through market falls. Set dates for portfolio reviews once in every quarter or six months, to control churn.

Review and replacement

Reviewing and replacing chronic underperformers once in a while is essential to successful DIY investing. When reviewing, focus on your portfolio returns being on track to meet your goals, rather than on relative rankings. Using index funds instead of active ones is a good way to cut down on the need for frequent tracking and replacement.

Change is the only constant in investing. So, a change in your life situation or options available in the market may call for an overhaul of your DIY portfolio over time. Keeping track of developments in the world of investing requires a regular reading habit. When choosing reading or viewing material, steer clear of content that offers you ‘five must-have funds’ or ‘six funds to make you rich’ on a platter and try to know more about how markets work and principles of investing. Content from personal finance blogs and videos by SEBI-registered analysts/advisors, personal finance portals or newspapers may be more reliable than free ‘advice’ from social media influencers.

But no matter where you get your information from, treat all product-specific advice with a large dose of scepticism. Put every recommended fund through your own personal filters on track record, downside containment and suitability to your goals, before adding it to your portfolio.