Financial planners suggest that before preparing a portfolio of mutual funds, the investor should answer some questions. For example, how much risk can you take? What is your goal? How much cash you require? How long can you keep your investment? and how much tax is applicable.
The answers to these questions will determine how much risk the investor can take, and based on this, the composition of the Mutual Fund portfolio will be decided. An investor who wants very little risk is a conservative investor, a moderate risk-taker is a moderate investor, and an aggressive investor is one who is willing to take a lot of risk.
Generally, it is advised to keep a maximum of 5 to 9 mutual fund schemes of different categories. These categories are equity, debt, etc. in their portfolio. In this table as well, emphasis has been placed on the importance of diversification by including different mutual funds in each category.
Moneyfront’s Co-Founder and CEO Mohit Gang says that a conservative investor’s mutual fund portfolio should have a ratio of 70:30 between debt and equity. 70 percent investment in debt schemes and 30 percent investment in equity schemes. Similarly, for a moderate investor who is willing to take medium risk, this ratio will be 50:50. For an aggressive investor, this ratio should be 20:80, meaning 20 percent investment in debt schemes and 80 percent in equity schemes. To create a sustainable portfolio, a mutual fund investor should always invest according to risk risk-taking ability.
Now let’s understand how can you invest in debt mutual funds for an ideal portfolio.
If the investor is conservative, then, the portfolio should have 20% short term funds, 10% corporate bond funds, 20% banking PSU funds and 20% target maturity funds…Similarly, if the investor is moderate, then the portfolio should have 20% short term funds, 10% banking PSU funds and 20% target maturity funds…If the investor is more risk-taking, i.e. aggressive, then, the portfolio should have 10% short term funds and 10% target maturity funds.
Now lets understand how investors should allocate equity funds. If the conservative investor has to keep 30 percent investment in equity, then, his portfolio should have 10% hybrid funds, 10% multi or flexi cap funds and 10% large cap funds.
Similarly, if the investor is willing to take medium risk, i.e. moderate, then, his portfolio should have 50 percent equity schemes, 10% hybrid funds, 10% multi or flexi cap funds, 20% large cap and 10% mid-small cap funds.
The aggressive investor’s portfolio can have 80 percent equity. 10% should be hybrid funds, 20% multi or flexi cap, 5% value funds, 25% large cap and 20% mid-small cap funds.
Those investors who want to create wealth in the long term, they should stay with the basic elements of financial planning. These are goal-based investing, asset allocation, diversification, regular review of investment and most importantly patience and discipline.
Whenever you invest in mutual funds, keep in mind that it should be based on your risk-taking ability, investment horizon i.e. how long you want to invest and investment goal. It should not be that you suddenly take any decision without thinking. If you are not sure what to do, you can take the help of a financial advisor.
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