How to Build an Ideal Mutual Fund Portfolio?

You might wonder what exactly mutual fund portfolio means!

Well, in a layman’s language, a portfolio is nothing but a bundling of different financial assets which may include bonds, stocks, mutual funds, other counterparts, etc. To carry out a successful mutual fund portfolio, diversification is one of the key component.

Now, what does diversification mean?

If you think diversification simply means segregating the different number of mutual fund schemes that you may have invested so far, then probably you are getting it ‘WRONG’! In fact, diversification is perfection wherein your funds remain unaffected in your mutual fund portfolio even in case an economic slump arises. This would certainly help you gain increasing returns and lowering your risks too.

Let us now understand more about building an ideal mutual fund portfolio..

‘Building an ideal mutual fund portfolio’, goes hand-in-hand with an old saying; ‘Do not put all your eggs in one basket’. If you follow this small piece of advice, definitely you would be successful in building a good portfolio for your mutual fund.

You need to compare mutual funds and create a customised portfolio of the top performing mutual funds according to your risk appetite (the ability to take risk). There are a lot of asset management companies which offer mutual funds in India and you might be confused as to how to create the ideal mutual fund portfolio.

Here are some factors which need to be considered while creating the ideal mutual fund portfolio:

• Time Horizon of Your Goals: Before you compare mutual funds to decide which one to invest in, you need to determine the time horizon of your goals.
• Linking Funds to Your Goals: Your next step would be to map the top performing mutual funds for your long term and medium term goals.
• Core and Satellite Portfolio: The core portfolio will be invested in top performing mutual funds according to your long and short term goals. The satellite portfolio will be invested in riskier equity and debt for additional gain.
• Risk Tolerance More Important: Risk tolerance relates to your age, income level, your assets and liabilities, dependents, and so on. This is more important than risk appetite.
• Mix of Fund Categories: When creating a portfolio of the top performing mutual funds to achieve your goals, keep the risk-reward aspect in mind.
• Rebalance Your Portfolio: It is important to constantly review and rebalance your portfolio if any of the funds are not performing as expected.

Now comes the million dollar question…

Which Mutual Fund to Pick?

Largecap, Mid-cap, Multicap, or Smallcap?

By nature, large caps are more stable when compared to mid-cap and small caps. When markets start picking up, mid-caps will be a great choice as they outperform large caps.

However, when it comes to creating a portfolio, your risk tolerance is a more important factor.

Does a Mutual Fund's Size Matter While Investing?

The important thing to look for in a mutual fund is the track record and not the size of the fund. The top performing mutual funds are the ones that have a consistent past performance in the bullish phase (rising markets) and the bearish phase (falling markets).

Here are some top performing mutual funds which you must consider investing in:

L & T India Value Fund

This value oriented equity fund is one of the top performing mutual funds as it has generated annualised returns of 14.8% since inception. It has an expense ratio of 2.09%. The 3-year and 5-year returns are 10.69% and 21.6% respectively. It has been a strong performer beating the benchmark by 10 to 12% and peers by 2 to 3%. It selects undervalued stocks with strong fundamentals.

Mirae Asset India Equity Fund

What makes this multicap fund one of the top performing mutual funds is the 15.75% annualised return since launch. The 3-year, 5-year, and 10-year annualised returns are 14.23%, 18.81%, and 22.19%. It has an expense ratio of 2.2%. It has outperformed the benchmark and its category over the past 10 years.

SBI Magnum Multicap Fund

This multicap fund is on the list of top performing mutual funds given its annualised return of 12.17% since launch. The expense ratio is 2.29%. The 3-year, 5-year, and 10-year annualised returns are 10.92%, 18.5%, and 17.04%.

Aditya Birla SL Frontline Equity Fund

This large cap equity fund is among the top performing mutual funds generating annualised returns since 20.69% since inception. It has an expense ratio of 1.97%. The 3-year, 5-year, and 10-year annualised returns are 10.88%, 14.74%, and 18.15%.

ICICI Pru Bluechip Fund

One of the top performing mutual funds in the large cap category, it has generated annualised returns of 14.10% since inception. It has an expense ratio of 1.96%. The 3-year, 5-year, and 10-year annualised returns are 12.36%, 14.72%, and 19.27%.

SBI Bluechip Fund

This large cap mutual fund is one of the top performing mutual funds because of its annualised returns of 10.75% since launch. It has an expense ratio of 1.98%. The 3-year, 5-year, and 10-year annualised returns are 9.5%, 15.83%, and 17.7%.

5 Strategies to Adopt While Choosing the Best Mutual Fund

You might be confused over the best mutual fund to invest in due to the availability of so many categories like large cap, mid cap, and small cap mutual funds in India. However, before you look for the top performing mutual funds, it is important to consider primary factors such as risk tolerance and investment horizon.

Beyond these two, there are five more factors that you need to keep in mind:

Risk Profile

Your choice of best mutual funds to invest in would depend on your ability and willingness to take risk. If you are a conservative investor, you can consider large cap funds which are more stable in rising and falling markets. For aggressive investors, mid-caps and small caps are the best mutual funds to invest in.

Expense Ratio

Expense ratio or the expenses required to manage and operate a fund are lower for large caps as their expenses are spread over a larger asset base compared to small caps or mid-caps. To compare mutual funds, expense ratio should be considered.

Time Horizon

If you are an aggressive investor, small caps are the best mutual funds to invest in for a 10-year time horizon as they have outperformed large caps and mid-caps. Small cap mutual funds in India have performed well in the 5-year time horizon as well.

Small and Mid-Caps for Experienced Investors

If you are new to mutual funds, then large caps would be the best funds to invest in as they are less volatile compared to small and mid-cap mutual funds in India.

Diversification

If you are new to investing, then choose from the top performing mutual funds in the multicap (combination of large cap, mid cap, and small cap) category. Multicap funds are the best mutual funds to invest in for moderate investors in the long term.

Achieve Your Dreams with the Ideal Mutual Fund Portfolio

When designing your ideal portfolio with the top performing mutual funds, you need to keep in mind that it has to be customised to your long and short term goals as well as risk tolerance. Once you find out the amount you need to invest monthly through a SIP, then choose the best mutual funds to invest in.

Read on to understand the ways to build an ideal mutual fund portfolio.

Stay focused, stay disciplined and achieve your goals through mutual funds.

Recommended Read: Understanding of How Mutual Funds Investment are Taxed