How to build a Mutual Fund Scheme Portfolio? 

Mutual funds are emerging as the most preferred investment product amongst investors considering the range mutual fund schemes and benefits it offers. One must create a diversified mutual fund portfolio across different asset classes. One must design the portfolio, considering the following three primary inputs:

 

It is paramount to link the investment portfolio with specific financial goals. Linking the investments with financial goals incentivises the investors to continue investing for that goal and further helps them to resist the temptation of redeeming the investments earlier to achievement of the goal.

 

It is also essential to ascertain the time horizon desired for the investments, as different schemes may be suitable for different time horizons. While a liquid fund may be suitable for short-term investment needs or for managing the surplus liquidity, small-cap funds may be ideal for long-term investment horizon. But it may not be suitable for short-term investment plans considering its volatility.

 

Having an aggressive investment portfolio for a conservative investor or vice versa may cause a mismatch in the return and risk expectations for the investors. It is advisable that the investment portfolio is aligned with the risk profile of the investors, which can make the investment experience pleasant for them.

 

The primary aim of the investors to build an investment portfolio is to generate returns from such investments. Further, it is reasonable for them to expect that the returns curve is linear. However, such expectations are seldom met, considering the dynamic and volatile nature of markets. Therefore, investors must instead seek to mitigate such risks.

 

This investment objective can be achieved by adopting a core-satellite portfolio strategy. In such an investment strategy, the core of the investment portfolio is invested in robust and less volatile mutual funds. At the same time, the satellite portfolio of mutual funds can provide a fillip to the returns through the adoption of a relatively aggressive strategy. As one moves towards the satellite portion, the investment strategy shifts steadily towards selecting slightly aggressive mutual fund schemes to generate better returns for the investment portfolio.

 

The fundamental objective behind the core-satellite portfolio strategy is to create a diversified and balanced mutual fund portfolio. There is no thumb rule for the optimal proportion of the core and satellite portion, and it may vary from investor to investor. It must be designed based on the risk-bearing capacity of the individual. Amidst the broader investment principles, the investors must note that the role of asset allocation assumes prime importance even within the core portfolio. Considering the core portfolio aims to achieve the financial goals in a time-bound manner, it must be constructed carefully and reviewed periodically for any variations between the actual returns and the assumed returns.

 

Since the core portfolio tends to provide a strong foundation for the investment portfolio, such an investment portion can comprise of reasonably stable mutual fund schemes across asset classes. The core investment portfolio may include allocation to debt funds (short-term income funds, corporate bond funds, etc) large-cap equity funds, and passive funds (like index funds& ETFs – Exchange Traded Funds) etc.

 

It is generally assumed that the broader markets and market leaders tend to stay a step ahead of the markets. Accordingly, the fundamentals and financial strength drive portfolio performance. Further, the alpha generation by the fund manager becomes difficult due to the availability of information in the public domain. In such cases, the lower expense ratios in passive investment products can help generate better returns.

 

While the debt allocation within the core portfolio aims to provide stable and reasonable returns to the investors, the proportion of such allocation also tends to vary for different investors. Investors must realise that a portfolio being aggressive or conservative, is a relative term. For an investor, a portfolio with 30:70 allocation in favour of debt mutual funds may be a conservative portfolio. At the same time, the same may still be an aggressive portfolio for a highly conservative investor who does not wish to invest in equity funds.

 

The satellite portion of the investment portfolio tends to shrink as the achievement of financial goals approach closer. Investors should tend taking a lower risk, looking to preserve the portfolio value. This makes it important to periodically review the mutual fund portfolio and rebalance it with the changed risk profile.

 

As such, a core-satellite portfolio strategy can be a fundamental investment strategy to build a mutual fund portfolio to achieve the financial goals over the long term.

 

DISCLAIMER:

 

The information in this document is provided for information purposes only. It does not constitute any offer, recommendation or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it constitute any prediction of likely future movements in rates or prices or any representation that any such future movements will not exceed those shown in any illustration. Users of this document should seek advice regarding the appropriateness of investing in any securities, financial instruments or investment strategies referred to on this document and should understand that statements regarding future prospects may not be realized. The recipient of this material is solely responsible for any action taken based on this material. Opinions, projections and estimates are subject to change without notice. UTI AMC Ltd is not an investment adviser, and is not purporting to provide you with investment, legal or tax advice. UTI AMC Ltd or UTI Mutual Fund (acting through UTI Trustee Company Pvt. Ltd) accepts no liability and will not be liable for any loss or damage arising directly or indirectly