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For those who don't have the time or inclination to identify and monitor individual stocks, mutual funds take on the burden of managing your money. However, you still need to build your portfolio with care. Here are some pointers to get started.
Determine investment amount
If you have just begun saving and do not have a significant surplus in your bank account, start small. A Systematic Investment Plan (SIP) is a good option for those who wish to build their fund portfolio gradually. As it works on autopilot, it prompts saving in a disciplined manner. It also minimises risks of bad timing of investments.
Allocation pattern
Your portfolio of funds must have an allocation pattern that meets your return objective and is in line with your risk profile. Young investors with a moderate-risk appetite, for instance, can have a 60 per cent allocation to large-cap oriented funds and a 40 per cent allocation to mid-cap funds. You could further create a core and satellite portfolio. Your core portfolio of funds should be plain vanilla diversified funds that have outpaced markets consistently over a three-five year period. Hold these funds for a period of at least three to five years. You can allocate a small portion of your portfolio, say 20 per cent, to funds you would like to experiment with, such as sector funds, value or contra funds, or funds which invest globally. These can help enhance the overall returns.
Diversify your portfolio
Do not choose too many funds from the same fund house. Choose funds with different styles of management. For instance, some funds may tend to diversify their portfolios substantially, limiting individual stock exposures to 5 per cent. Others may take concentrated sector exposures. Ultimately, the fund must be able to compensate you for the risk taken. Invest in a mix of management styles to maximise returns for a given level of risk. However, there is no ideal number of funds to hold. For instance, if your objective is purely diversification, even five funds with different styles should suffice.
Qualitative factors
Besides performance, you need to consider qualitative factors as well. Take a look at the fund's objective or mandate as defined in its offer document. The fund house can, at times, define these objectives rather vaguely. Identify funds that have a well-articulated strategy and that tend to largely stick to their investment objective. Conviction in ideas is something to be valued. If a fund has a loosely defined investment objective, it might stray from its mandate, which will defeat the purpose of your investment.
Track portfolio performance
Once you begin investing in funds, do not constantly monitor or fret about it. Remember, the entire concept of mutual fund investing is based on you being a passive investor. However, do review the performance of your funds once in six months. Compare funds to their benchmark and then to their peers. There could always be temporary blips in performance. But this is no reason to re-draw your portfolio. Fund managers take a long-term view of the markets. Therefore, you need to stay invested with the fund for a long period to realise the full benefits of its investment strategy.
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