One can say that ‘Mutual Fund’ is one of the investment option today, which is really a smart one!

A perfect financial recipe with hosts of ingredients that can suit anyone’s financial health. And it has a blend of all the flavors of investments like Equities, Bonds, Government Securities, Cash.,  isn’t it? On top of it – It ensures to follow the basic rules of investments  like being disciplined, regular, diversification etc. It’s a systematic strategy for managing investment risks and is suitable for any time horizon be it short or long.

Investing in mutual funds is also easy as anybody (not minor) can invest in it through agents, brokers, directly or online through  from mutual fund AMC’s.

But Investors often gets confused with the fleet of options available in market today. The schemes presented through advertisements, big banners with highlighted ratings or rankings are so attractive that people tend to purchase it without even giving a second thought to their investment objectives. It’s like candies which comes in different colors, tastes, packages which lures one and makes it hard to decide which one to go for and how many?

Sometimes our decision gets hampered with our colleagues, friends, relatives who suggest a scheme to go for may be because they received some portion of profit from it. Be wise, take a look at some of the points below to understand how to choose and make a good mutual fund portfolio. Also, do not forget to read about mutual fund investing facts Facts investors should consider about mutual fund investing.

Mutual Fund Scheme Objectives:

Mutual fund investments are really “simple”!  Investors are getting ready-made portfolios and have option to choose which best fits their objectives. Many investors go for the schemes in mutual funds which are popular and delivered good returns. But that should not be the only criteria for choosing the scheme. Each mutual fund scheme has its own objective /goal, associated risks, style of investment. Therefore, as an investor one should align his own objectives with the schemes objectives and should also try to match other factors like risks, returns and time horizon. The Mutual Fund Scheme Prospectus is the best source of information. It also mention fees and expenses, past performance, asset size, fund manager details, etc. So grab a copy now before you write a new cheque.

Past Performance:

Past performance is important. Look for the Funds history, performance, dividend-history, volatility of fund are the very important points. One should compare it with its peers from same category. However, Past performance is not the sole criteria as it does not guarantee future performance. But it can help you to derive that by knowing the associated risks, changes in investment.

Equity fund or Debt fund?:

Equity fund are those funds which invests in stock market directly.Equity funds can give you a pleasing ride of share market at a low-cost. Debt funds are those which invests in Debts, Bonds and Government Securities. Generally speaking, Debt Funds are for short-term goals while Equity funds are for long-term objectives. You can take advantage of both through Balanced Funds which is a mix of  Debt and Equity Funds.

Mutual Fund Portfolio:

Investors find this one little tricky, MF portfolio depends on your financial objectives, risk appetite, time horizon and other similar factors. Regarding  the number of funds in a portfolio, some investors will just keep adding funds with a view to book more profit while on the other hand some will just invest in 2-3 funds. How many funds should be in portfolio?,  is a debatable question. But according to Morningstar study, after a certain point the standard deviation of a portfolio remains the same even if you keep on adding more  funds; hence, a suggestion is to have maximum 5-6 funds in your portfolio.

Diversification:

Diversification is not about how many Mutual Funds you own in a portfolio but it talks about “which” ones you have invested in. Diversification means allocation of money in different types of asset classes. Portfolio should be such that it maximizes the return by minimizing the risk. Concentrating on any particular fund type may give you low returns or increase risk. Diversify your portfolio with some good equity, balance funds. Diversification should be such that it will able to liquidate easily in case of emergency and could not make you sell good fund in down market.

New Fund Offers(NFO):

New Fund Offers are mostly sold on a fact of  “more units (face value) at low NAV”. Don’t go for NFO  if it’s not helping you in your objectives. But if you decide to go for it then check which Mutual Fund AMC is offering the scheme, its objectives, investing style.

Control your Emotions:

Mutual fund investment, specially equity funds are long-term investment like any other investments. Many investors could not control their emotions with market blues and if market shoots up they tend to book profit, if it goes down, they think it’s an under performer and want to get rid of it. Every fund has its own ups and downs. If market is down continuously just wait and watch, it’s the best strategy!

However, if the fund is consistently under-performing even in bull market  then it may be the time to get rid of it. Remember, your portfolio needs regular reviews; though impatient and unnecessary changes could cost you more expanses.

Happy Investing !

References:

• CNN Money
• Morningstar