How to create a perfect mutual fund portfolio?

Last Updated : March 24, 2020, 5:37 p.m.

All of us want that perfect mutual fund portfolio. Well, is there something like a perfect mutual fund portfolio? “Perfect” being subjective could mean a portfolio that doesn’t fall and only rises. Well, that’s not possible since all mutual fund portfolios are linked to stock markets, interest rates, economy, currency, fiscal & current deficits, fund managers, etc.

So rather than being perfect, once should look for an ideal mutual fund portfolio. An ideal mutual fund portfolio should be based on these four factors:

1)Age- If you are young, your mutual fund portfolio should be more tilted towards equity funds and lesser on debt funds. This is because you have a long time period ahead of you to save and invest. Also, equity mutual funds give the best returns over a longer period of time.

As a thumb rule, one’s equity portion should correspond to what their age is, so if you are 30 years old, your portfolio should have 70% exposure to equity mutual funds. Now, this is not a hard and fast rule, you could decide to have an even higher or lower allocation to equity. The rest should go to debt mutual funds.

2)Risk appetite – If you are a conservative investor, about 70-80% of your investments should go in debt mutual funds and the rest in equity funds. Obviously, the returns from such a portfolio would be in the range of 8-9% since you are taking less risk. On the other hand, if you have a higher risk appetite, you could invest 70%-80% of your overall portfolio in equity mutual funds.

3)Time horizon – if your time horizon is less than 5 years, it’s better to be in debt or balanced funds, for equity mutual funds, your time horizon should be more than 5 years.

4)Return expectation – If you just want a 7-8% return, don’t look beyond debt funds. However, if your expectation is of double-digit returns, you have to invest a sizeable portion in equity funds.

Let’s understand with a couple of examples:

• Amit is 35 years old, has a time horizon of 10 years, aggressive risk profile and a high return expectation. In this case, the suggested portfolio would be 65% in equity funds-one diversified and one mid-cap, 20% in balanced funds and the rest 15% in liquid funds.
• Karuna is 51 years old, has a time horizon of 5 years, moderate risk profile and a reasonable return expectation. In this, the suggested portfolio would be 20% in equity,30% in balanced funds and the rest 50% in liquid funds.

It is important to have a proper asset allocation and not invest 100% money in one kind of mutual fund schemes. An ideal portfolio should consist of 4-5 mutual fund schemes, look for schemes with a good track record and a fund house with a  good pedigree. Once you have analyzed all these 4 factors, you can go about creating the ideal mutual fund portfolio. A portfolio created by this method helps one weather storms like the current market meltdown. Stay true to your asset allocation and you should be able to achieve your goals.