Managing Your Mutual Fund Portfolio

Proshare

Friday, July 25, 2014 11.11 AM / Proshare Research

 

Mutual funds are one of the best ways to invest one’s money, given the sheer number of choices catering to every type of investor preference, the fact that one need not monitor the investments on a minute to minute basis (unlike if one’s investments were directly made into securities), and the ability to diversify one’s portfolio without high initial capital. Equity funds, Debt funds, Money market funds, balanced funds are some of the different kind of funds under mutual fund.

 

Before investing know whether you are risk averse or a risk taker. Risk tolerance is measured by how much market risk (fluctuations/volatility) you can handle at a given period of time, and the higher your risk tolerance the higher the proportion of stocks in your portfolio, whereas if the risk tolerance level is low then your portfolio should consist of a higher component of debt instruments and a lower equity component.

 

Also, be clear on the time frames you set for your investments in various assets, since the investments will be meant for certain financial goals, and these should be classified into short, medium, and long term. Based on these goals, you will have to look at investing in similar asset classes.

 

There are several factors to consider while buying a mutual fund, with the timing being crucial. Human mentality is to buy when the markets are booming, but contrary to our in-built thought process, it is always better to enter when the markets are down and you believe that there are signs of recovery – this will ensure that you benefit in the long run.

 

Some points to keep in mind while selecting a mutual fund such as, before investing in a mutual fund, investors should read the policy document and conditions of the fund carefully, and should conduct research on mutual fund manager ‘s performance track record, the fund house’s reputation, the past performance of the fund, corpus size of the fund, etc. The mutual fund manager’s investment skills can be best determined by measuring their performance through a full market cycle of 3 to 5 years.

There are several classes of mutual funds that you can opt for in the market today, and indeed this is a bewildering choice. We have analyzed a few types of funds to give you a better sense of which funds might be reasonably expected to do better in the long run.

 

Managing Your Mutual Fund Portfolio

A mutual fund is an investment avenue for small and large investors alike, wherein the investors’ money is pooled in and professionally managed & invested by fund managers. This benefits investors as they can get the advantages of scale as well as returns from a professionally managed portfolio at a fraction of the cost of what it would otherwise cost.

 

Mutual funds are one of the best ways to invest one’s money, given the sheer number of choices catering to every type of investor preference, the fact that one need not monitor the investments on a minute to minute basis (unlike if one’s investments were directly made into securities), and the ability to diversify one’s portfolio without high initial capital.

 

 

Through this diversification, one’s portfolio risk is reduced. In brief, mutual funds provide a steady flow of income or capital appreciation in the short or long term (depending on one’s investment horizon and goals) through a diversified portfolio at a low cost and lower risk. Also individual can avail 100% income tax exemption on all mutual fund dividends.  

 

 

There are several factors to consider while buying a mutual fund, with the timing being crucial. Human mentality is to buy when the markets are booming, but contrary to our in-built thought process, it is always better to enter when the markets are down and you believe that there are signs of recovery – this will ensure that you benefit in the long run.

 

Monitor Your Portfolio

Mutual fund investment offers potential risk of capital loss, and no two funds are fully alike – meaning that although a majority of your investments might be doing well, some will be underperforming – it is prudent to keep regular tabs on your investment portfolio. Equity funds, Debt funds, Money market funds, balanced funds are some of the different kind of funds under mutual fund. You can choose some of these funds in your portfolio mix keeping in mind your risk and time horizon requirement.

 

Risk Appetite

Before investing know whether you are risk averse or a risk taker. Risk tolerance is measured by how much market risk (fluctuations/volatility) you can handle at a given period of time, and the higher your risk tolerance the higher the proportion of stocks in your portfolio, whereas if the risk tolerance level is low then your portfolio should consist of a higher component of debt instruments and a lower equity component.  A risk-taking investor will be able to invest in a mid-cap or a small-cap fund but at the same time a conservative investor will be more interested in a bond or safer large-cap fund.  Investing in Balanced funds, money market funds, debt funds is helpful for low risk tolerance individuals as it provides balanced returns and reduced risk.

 

Time Horizon

Be clear on the time frames you set for your investments in various assets, since the investments will be meant for certain financial goals, and these should be classified into short, medium, and long term. Based on these goals, you will have to look at investing in similar asset classes, for example for short term goals it is advisable to invest in bank deposits, for medium term goals one can look at bonds as well, and for long term goals equity investments will be the best option. Also, keep in mind that the longer you hold the investment, the more the returns thanks to the power of compounding.

 

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4.    Why invest through mutual funds?

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