Number of funds in your portfolio
There are a number of theories on which long-lasting portfolios are built. This is because a number of factors are needed to be considered before building your portfolio. Selecting and investing in the bunch of some of the best performing fund will not make a winning portfolio for you. There is no doubt that you should have a well-diversified portfolio however, diversification also, beyond a point, losses its importance in lowering your portfolio risk. Therefore, a question arises as to what should be the ideal number of funds in your portfolio that gives better returns at lower risk?
The Five Asset Class and 10 Funds
Among various types of portfolios, one that many of us in India can adopt is five-ten portfolio, which means that you should have five asset classes in your portfolio and ten funds. The five asset classes where you can invest are equity, international funds, REITs, bonds and cash or cash equivalent. Once you have selected the asset class, now you have to go deeper and invest in sub-asset class within the broader asset class that you have selected earlier. For example, within equity, you need to invest in large-cap, mid-cap and small-cap funds. While getting international exposure, you can invest in funds dedicated to the developed market and emerging market. In the case of bonds, you can invest in short duration, medium duration and long duration bond funds. Besides this, you can have an exposure to real estate by investing in REITs and the cash part of your portfolio can be invested in liquid funds.
Weightage & Rebalancing
The weightage to individual funds should depend upon your risk profile. Nevertheless, equal weightage portfolio will also serve in most of the cases. Hence, in every fund, you can invest up to 10 per cent of your total portfolio. Once the portfolio is made, it needs to be rebalanced periodically and restore the weightage of the individual assets to its original weightage. You can also increase your weightage towards less volatile assets such as bonds, as you grow older if you want to play safe.