Build strong mutual fund portfolio to tide volatility

While building a mutual fund portfolio, investors must take a very cautious approach. In the recent time, markets have moved to a bear phase and this has led many investors to invest at a low price. However, doing so, would ideally call for investor’s fallacy. This means that you might expect the markets to move up from the point at which you invested. But this won’t be the situation anytime soon. Therefore, it is better not to take such hasty decisions and ruin your investment experience.

While investing, it’s not returns that matters but investment experience. If you get compounded annual growth rate (CAGR) of say, 12 per cent but suppose investments hit badly during volatile times then, it will often give not so good experience. On the contrary, if you get CAGR of say, nine per cent but your portfolio was not hit by volatility beyond your tolerance level then, the experience can be said to be good. Therefore, experience is something that should matter the most. For a better experience, you need to build a strong portfolio that may help you tide volatility. Below are the few mutual fund categories that you should consider while building your portfolio:

A: Equity

As we all know, equity is an integral part of any portfolio since it is the one that would help you grow your investments and give you better inflation-adjusted returns. Below are the sub-categories to be considered while building a portfolio:

1. Large-cap funds or index funds

2. Mid-cap funds

3. Small-cap funds

4. Multi-cap funds

B: Debt

Investment in debt mutual funds is also equally important. Debt funds usually help you to minimise your overall portfolio risk. Debt plays a crucial role when equity market corrects. Below are the sub-categories that should be considered while building portfolio:

1. Liquid funds or ultra-short duration funds

2. Short-duration funds

3. Long-duration funds

4. Gilt funds

We do have credit risk funds and dynamic bond funds. But these funds are way riskier than the abovementioned funds. Therefore, they can only be considered by moderately aggressive to aggressive investors for financial goals but not for financial needs.

C: Gold

Gold is something that most of the investors trust to be the safest asset that gives good returns. However, gold should not be considered as investment. Rather, it should be considered as a hedging tool for your portfolio. Gold would often hedge you from the worst market conditions like the one we are currently facing. Therefore, it is also wise to include gold in your portfolio. And, rather than investing in physical gold, it is better to invest in gold mutual funds or ETFs or even in sovereign gold bonds. Remember, gold should form not more than 10 per cent of your portfolio.

For those who don’t wish or are not able to manage investments in different categories mentioned above, they should consider investing in balanced advantage, dynamic asset allocation fund or multi-asset allocation fund. The fund managers would do this for you.

One more significant thing to remember here is that the proportion of investment would depend upon your risk profile and financial goals.

Although, in general term, investors with different risk appetite can consider below proportions:

Even the equity conservative investors should invest more in large-cap or index funds and a small portion in mid-cap funds. They should totally avoid small-cap funds. In case of debt funds, investing in ultra-short duration fund and gilt funds would be ideal. Conservative investors can even consider aggressive hybrid fund as a substitute to large-cap funds.

For moderate investors, in equity, a good balance between large-cap, mid-cap and a small portion should be allocated to small-cap funds. In case of debt fund, short-duration and gilt funds would be a better bet.

In case of aggressive investors, in equity, small portion should be allocated to large-cap and try to strike a balance between mid-cap and small-cap funds. In case of debt funds, long duration funds and dynamic bond funds would be the ideal investment options.

Hence, the above proportions among various categories and sub-categories are generic in nature and may differ from one investor to the other. Therefore, it is highly recommended to have a financial plan in place, which will guide you regarding the same.