Plan well to make a sound mutual fund portfolio

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Mutual funds, a large pool of money dispersed across stocks, bonds and money market instruments, diversify the risks and provide healthy returns to the investor. Fund managers are entrusted with the responsibility to keep shuffling the investments across different securities on varying market conditions. This is done to compensate for loss due to any stock plunge with the rise of another. Moreover, the volatility of equity market is greatly reduced by the investment in debt schemes that provide low but steady flow of returns. This was all about the basic information of mutual funds. Now get down to the overriding question of how to make a sound mutual fund portfolio amid a large number of funds in the market. Here are some of the funds that you can choose to build a mutual fund portfolio that will reduce volatility as well as the tax liability.

Index Funds

Index funds or passively managed funds, a type of mutual funds, are designed to either match or track the components of a market index, including Standard & Poor's 500 Index (S&P 500). Moreover, the funds also match the returns of a benchmark index. These funds offer broad market exposure, low portfolio turnover and low operating expenses. With fund managers do not have the control in picking the funds, the risk of wrong judgement is eliminated. Index funds are diversified greatly as they invest in a large number of stocks.

Actively Managed Funds

Actively-managed funds have outperformed the benchmarks over the years and are likely to do the same in the years to come in India. You can include these funds in your portfolio as they invest in large companies and remain less volatile than small and mid cap funds.

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Equity-focused Hybrid Funds

Equity-focused hybrid funds expose 65% of their investments into equity and the rest in debt schemes. With more investments towards equity, you get into high-risk, high-return trajectory. While investments in debt provide the cushion against the volatility of equity, if any.

Long-term capital gain on equity funds is exempted from tax. In order to qualify for long-term capital gain, the investments in equity funds must have been held for over a year. However, if you redeem before a year, tax at 15% plus surcharge and education cess, if any, will be applicable. Investments in debt funds are not tax-free. tax as per individual slab is imposed on investments held for less than 3 years and 15% on the investments for over 3 years. Moreover, applicable surcharge and education cess will also be levied.

Fixed Maturity Plans

Fixed Maturity Plans (FMPs) are close-ended debt funds that invest in debt instruments such as certificates of deposits (Cds), corporate debt and commercial papers (CPs). The low-cost investment vehicle offer features including a pre-specified maturity date, quality debt instrument, lock-in period till the maturity date, risk adjusted returns along with indexation benefits on assets held for a term of 1 year-3 years.

As FMPs purchase securities with a fixed maturity date, you will be immune from the interest rate risk upon holding the instrument till the maturity. FMP investment means purchasing various securities such as fixed deposits, recurring deposits. Dispersing the money across such securities cut down the risk factor.

Gold ETFs

Gold Exchange Traded Funds (ETFs) are a tool to track the price of physical gold. With gold ETF, you own gold in your demat account. So, you would be able to accumulate gold over a certain period of time. You can plan to buy the gold as per your requirements as it can be purchased in small quantities.

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Sector Funds

Sector funds are the type of mutual funds or Exchange Traded Funds (ETFs) that invest in specific sectors like Telecommunications, Information Technology, Banking, Automobile, Pharmaceuticals, etc. These funds invest in sectors where positive growth trends are there. You can take advantage of such trends to bolster your mutual fund portfolio.

Thematic Funds

Thematic funds, unlike sector funds, are based on themes and not a specific sector. The investments here are broader and are diversified more than sector funds.

Small and mid cap funds

You can choose a few small and mid cap funds, which must have performed well over a period of time, to achieve higher returns on your investment.