How To Build Your Equity Mutual Fund Portfolio?

Are you looking at risk-adjusted returns from equity funds? Do you want to diversify your equity investments? You may consider building an equity mutual fund portfolio. It helps you get higher returns from your equity mutual funds with the least amount of risk. However, you may invest in equity funds only if it matches your investment objectives and risk tolerance. Let’s take a look at how you may build an equity portfolio for any market.

What is an equity portfolio?

You may consider an equity portfolio as a collection of investments in stocks. You could spread your investment across different equity mutual fund schemes and build your equity portfolio. 

However, you may consider diversifying your portfolio with fixed-income investments to protect it from the volatility in the stock market. You could build your portfolio depending on your age. 

You may consider subtracting your age from a hundred to arrive at the proportion of equity in your portfolio. For example, if you are 25 years of age, then according to the hundred minus age rule, you could have 75% of your portfolio in equity investments. 

How to build your equity mutual fund portfolio?

Build a core and satellite portfolio

You may consider building a core portfolio to attain your long-term financial goals. It may form 60%-70% of your equity portfolio and offers stability in the long-run. You could invest in index funds, ELSS and large-cap funds to build your core equity portfolio. 

You could consider a smaller portion of your equity portfolio as the satellite portfolio. For example, you may have 15%-20% of your equity portfolio in satellite assets. You could invest in sector funds, mid-cap funds or even small-cap funds as part of your satellite portfolio. You may have to actively manage your satellite portfolio as compared to your core portfolio. However, the satellite portfolio may boost the overall returns from your equity portfolio. 

Understand your risk tolerance

You may consider taking a look at your risk appetite before putting money in equity funds. For example, you may find sector funds and mid-cap funds to be more volatile as compared to large-cap funds. 

You may determine your asset allocation, which is a mix of stocks, bonds and cash depending on your risk appetite. You may consider a higher allocation towards thematic funds, sector funds or mid-cap funds in your equity portfolio if you are an aggressive investor. 

Also Read: How is Investing in Mutual Funds Different From Trading Stocks?

Select the right equity mutual schemes for your portfolio

You could consider checking the track record of the mutual fund house and the fund manager of the equity fund. Invest in the equity mutual fund only if you are comfortable with the investment style of the fund manager. 

You could pick equity mutual fund schemes that have consistently outperformed the benchmark and peers over three to five years. However, you must check the expense ratio of the equity mutual fund schemes. It is the total cost of managing the mutual fund, and you may opt for an equity fund with a lower expense ratio. 

You may consider diversifying your portfolio with four to five equity mutual fund schemes. It helps you monitor your portfolio in a better way and maximise your returns. 

Monitor your equity portfolio

You could monitor your equity portfolio to make sure it matches your investment objectives and risk appetite. You may consider rebalancing your portfolio if it deviates significantly from your original asset allocation. 

However, you must not follow a knee-jerk approach when rebalancing your portfolio. You may replace equity schemes from your portfolio only if they underperform the benchmark over some time. 

You may invest in equity mutual funds for the long-term to achieve your financial goals. You may spread your investments across equity schemes to protect your portfolio. However, investing in equity schemes that invest in the same basket of stocks won’t diversify your portfolio. You may consider investing in four to five equity schemes of different investment styles and market capitalisation, for an adequate diversification across sectors. In a nutshell, you may select equity schemes that match your investment goals and risk appetite.

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in