How should an ideal mutual fund portfolio look like?

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To keep the ‘financial portfolio’ simple can be challenging for mutual fund investors when they have a plethora of mutual fund schemes across various categories. Things become even complicated when the idea of having an ideal mutual fund portfolio is confusing to reach. There is no such thing as how an ideal mutual fund portfolio believes many financial experts.

“The answer to this question varies depending on the investors’ objectives. Investing is very personal and, understating investors’ requirements is the starting point for constructing a mutual fund portfolio,” said Vaibhav Porwal, co-founder, dezerv.

However, although there is no one-size-fits-all mutual fund portfolio template, portfolio selection is influenced by factors like age, income, financial goals, and risk tolerance.

Diversification

“It is essential to diversify the portfolio to prevent concentration risk and invest in various asset classes such as equity, debt, and gold. Diversifying a portfolio implies allocating investments across schemes and asset classes, allowing one to benefit from different fund management styles,” explained Sameer Kaul, MD, and CEO, TrustPlutus Wealth (India).

Further, it is always a good plan to spread your assets across different asset classes. The goal is to balance the market’s unpredictable nature and the desire to generate money from it.

“Given over the time it is becoming difficult for fund managers to beat the benchmark consistently in the long term, it is prudent to invest in passive funds, wherever available, to avoid unnecessary churn in one’s portfolio,” explained Swapnil Bhaskar, Business Head, Niyo Money.

Concurred Porwal: “Asset allocation contributes to 90% of the returns: Achieving the proper asset allocation is the most critical step of portfolio creation. This step aligns investors’ asset allocation with their investment objectives.”

Experts suggest investing in equity mutual funds should be well-diversified between large, mid, small, and flexi cap funds. The same goes for the debt mutual funds.

“Within debt, investors can include liquid funds (for the emergency corpus – ideally 3- 6 months of basic household expenses), short-duration, and medium duration funds. One should study the portfolio composition of the mutual fund scheme to gauge the level of credit and duration risk in the scheme,” said Kaul.

Portfolio rebalancing

When discussing the portfolio, two things cannot be missed, i.e., portfolio rebalancing and portfolio reviewing. To minimise your risk exposure, you’ve made several different types of investments over time. There will be times when your investments do well and periods when they don’t due to market conditions. As a result, it’s critical to periodically review your assets and rebalance your portfolio as needed.

Post-reviewing, it is essential to rebalance your portfolio periodically to reduce your risk exposure and ensure that your holdings are not solely dependent on the success or failure of a single investment, asset class, or fund.

“Periodic rebalancing (between equity and debt) of the portfolio is as important as creating a good portfolio. This is necessary to keep up with the changing market conditions and to reassess your investments based on your changing risk appetite. You may gradually switch to lower-risk investments as you get closer to your retirement,” said Priti Rathi Gupta, founder, LXME.