Mutual Funds: Here’s How to Construct a Well-Balanced Portfolio

Mutual funds continue to be a preferred investment tool among investors. In October 2023, Rs 16,928 crore inflows were witnessed in Systematic Investment Plan (SIP) accounts, adding up to a total flow of Rs 1.75 lakh crore over the past 12 months and Rs 13,040 crore in October 2022, according to the data of the Association of Mutual Funds in India (AMFI). 

With more than 44 registered Asset Management Companies (AMCs) or fund houses in the country, besides the availability of a wide range of fund categories, constructing a mutual funds portfolio based on one’s financial needs and objectives requires careful consideration and thoughtful deliberation. 

Here’s the lowdown on building a suitable mutual funds portfolio through selecting the categories of funds to invest in depending on the investment horizon and risk appetite. 

While constructing a mutual fund portfolio, a few important factors are required to be considered, including the age of the investor,  financial goals, and risk appetite. 

The age of an investor will define the investment strategy to be adopted, financial goals such as retirement planning or funding of children’s education will specify the timeline, and risk appetite will highlight the ability to tolerate loss in investment. 

For instance, an investor in their 30s or 40s can assign a significant portion of their portfolio towards equity funds, considering there is still time for retirement. However, as an investor approaches their financial goals, such as children’s education or retirement, they must consider shifting to debt funds as capital preservation remains crucial. 

Experts are of the opinion that risk tolerance accounts for about 60% of the decision-making process, which acts as a guide in the selection of mutual funds based on the risk profile, while the remaining 40% should take into account age and financial goal timeline when it comes to designing and constructing a well-balanced mutual fund portfolio.

After this, deciding on the type of mutual funds to invest in remains important, depending on an investor’s preference and requirements. For example, let’s say an investor mulls a 70:30 strategy in equity and debt. 

A part of the  70% pie, in case an investor is quite aggressive and has the horizon along with the capacity to face volatility, then they can be aggressive on thematic, sector, and small-cap funds, which could add up to 35% of that 70%. The remaining 65% of the 70% of equity allocation will be comprised of diversified funds. 

Those with a high-risk appetite could consider investing 50% of their equity exposure into large-cap funds and the remaining 50% in small-cap funds. Meanwhile, in case an individual has an investment horizon of three to five years, hybrid funds such as equity savings funds and balanced advantage funds could be focused on, considering they are less risky as compared to pure equity funds.

While predicting specific market periods could pose a challenge, investors could factor in various parameters to decide on making the most of market trends. These parameters include the price-to-earnings (P/E) ratio, price-to-book (P/B) value, standard deviation, and rolling returns in mutual funds. 

Moreover, always reach out to an experienced professional or financial advisor in case of any doubt when it comes to making an informed decision while investing in mutual funds.