8 important Steps to build ideal Mutual Fund Portfolio

Published On: 23-Aug-2019

It is rightly said that investing is an art. While many investors know ‘how to build a Mutual Fund portfolio,’ but the real need is to know ‘how to build an ideal mutual fund portfolio.’ This article will aim at guiding you about constructing an investment portfolio that suits your risk profiles and your financial goals.

Mutual Fund Portfolio

Here is a step-by-step guide to building a well-optimized mutual fund portfolio:

  1. Setting your financial goals – Just like it is essential to define your destination before you start for your travel, it is equally important to set out your targets for your investment journey. Your financial goals may range from immediate short-term goals like a family vacation or buying a car etc. to long term financial goals like buying your dream home or retirement planning etc. Further, to meet any financial contingencies, the list of financial goals must also necessarily include an emergency corpus of at least six months’ expenses, which may be placed in liquid and overnight funds. 

  2. Quantification of Financial Goals - Besides setting out your financial goal and its time horizon, you should also make a reasonable estimate of the amount required to achieve the financial goals. Such an assessment may be done by calculating the current costs to achieve the goals, adjusted suitably for the future expected inflation.

  3. Define your risk profile Risk profile denotes the risk-bearing ability of the individual. The investors may broadly be classified as aggressive investors, moderate investors and conservative investors. An aggressive investor may withstand higher movements in the portfolio, but at the same time, expects higher returns as well. On the other hand, a conservative investor may be contented with lower yields but equally matched with lower portfolio volatility. 

  4. Define the asset allocationOnce you have known what kind of risk profile do you possess, it is then the time to define your asset allocation strategy. A diversified portfolio spread across different asset classes is always desirable. The proportion of different asset classes in the portfolio is referred to as asset allocation and must be based on the risk profile and the investment horizon. An aggressive investor is likely to have a higher proportion of equity in his portfolio, while a conservative investor will tend to have a higher debt exposure in the portfolio. 

  5. Making Systematic InvestmentsOnce you have done all the research and planning about your financial goals and asset allocation, it is now the time to implement the plan. It is often said that “well begun is half done.” One may register a Systematic Investment Plan (SIP) to make periodic investments in different mutual fund schemes. As such, one continues to make investments across the market movements and averages the cost of investments over a period. Further, you must also consider topping up your periodic investments in sync with increase in income. It may help you achieve your financial goals at an early stage than anticipated earlier.   

  6. Reviewing of the Mutual Fund PortfolioWhile you may have made an investment decision to invest in a couple of mutual fund schemes as per your financial goals.  A periodical review of your portfolio helps you identify some underperforming schemes against their peers and benchmark. Suitable action needs to be taken to replace such schemes in your portfolio.  It is akin to checking out on your navigation map if you are on the right track to achieve your financial goals in time. 

  7. Periodic Review of the Financial Goals and Risk ProfileIt is also equally important to review your financial goals periodically to update the goals and the estimated amount required to achieve it. It may be caused by the change in priorities or more-than-expected increase in the estimated costs. While a downward movement in the financial goals may not necessarily call for updating in your financial plan, an increase in the financial goals must be suitably adjusted in the financial plan; else you face a probability of missing your financial goal. Further, the risk profile also tends to change with the increasing family dependencies and growing age. As one grows in age, the risk-bearing capacity tends to decrease. The asset allocation strategy must be suitably adjusted for such changes. 

  8. Rebalancing the Investment Portfolio – The periodic review of the mutual fund portfolio and the financial goals must be followed with the suitable adjustments in the financial plans and the mutual fund portfolio. Changing the asset allocation strategy may also call for a rebalancing of the investment portfolio.