Constructing a portfolio

By Morningstar |  25-06-18 | 
 

I want to invest in direct plans of mutual funds for 5 years and above. I have surplus money of Rs 5 lakh. Can you advise me how to set up my portfolio and which mutual funds are best?

- S. N. Gupta

While constructing a portfolio, asset allocation mix (i.e. the mix of various assets including equity, debt, gold, etc.) is considered as one of the key determinants of the portfolio’s performance, in terms of risk & return. A suitable asset allocation is typically based on one’s investment horizon and risk appetite. Generally, longer the investment horizon and higher the risk appetite, higher would be the allocation to equity. For example, if the investment horizon is 5 years and above, then 50% to 70% of your investment portfolio could be allocated to equity and 30% to 50% to debt. In case you hold other debt investments, in the form of PF, PPF, etc., fresh investments could be made into two or three equity funds through monthly Systematic Investment Plans (or SIPs).

For the aforementioned investment horizon, it would be advisable to select one or two large cap and one small/mid-cap equity fund or diversified equity funds that invest in large, mid and small cap stocks in varying proportions based on the fund manager’s views. For the debt allocation, it is advisable to select on or two short-term income funds. Additionally, one can consider investing in an International equity fund, which invests in European or Asian equity markets. International equities provide exposure to different economic drivers (vis-à-vis Indian equities), thereby helping diversify one’s portfolio.

When selecting funds, it is advisable to consider their performance over at least the previous three years to five years. This along with studying calendar wise performance vis-à-vis benchmark indices (like Sensex, Nifty, etc.) and peer group would indicate consistency across time frames and market cycles. Additionally, you could consider the fund’s AUM (AUM should be greater than Rs 500 crore.) and period of existence (longer the better). To evaluate mutual funds across categories, one can look at Morningstar’s star ratings and analyst ratings for funds. (http://www.morningstar.in/tools/mutual-fund-screener.aspx). One should consult his/her financial adviser before making investment in mutual funds.

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