Don't go overweight on any single scheme

while building your mutual fund portfolio, opt for a mix of equity diversified and sectoral funds

For a normal investor, investing their money has mostly been just a matter of doing what they have been doing in the past, like investing in fixed deposits (FDs), National Savings Certificates (NSCs), Public Provident Fund (PPF) and so on. However, lately, many people have been investing in mutual fund schemes too. Many among them have understood the significance of Systematic Investment Plans (SIPs) offered by these fund houses. And pay their monthly obeisance without fail.

But then, picking up the right set of schemes for investments remains a challenge. And many investors fail to recognise the need to do so. They just pick up what their friend / colleague has invested in or what is being currently advertised. A favourite among investors is the New Fund Offer (NFO) route. Even after a blizzard of articles specifically debunking the Rs 10 advantage in an NFO and highlighting the negatives of investing in a new scheme without a performance track record and possibly a new fund manager, investors continue to patronise NFOs.
Fund house filter: There are some fund houses which have built expertise in equity or debt fund management. Go to the experts and you would have won half the battle. Asset management companies which have a proven track record in equity asset management would be the fund houses to go to, for equity funds. Such fund houses would have the capacity to manage equity assets better than most, due to their better experienced fund managers, their processes and systems. There are some fund houses with niche capabilities like global investing or commodity stock investing. Go to them for these products.

Fund manager filter: Fund managers play a major role in the scheme’s performance. Though there are systems and processes that tend to minimise the individualistic nature of fund management, fund managers skill is essential for funds to perform well. You will notice that often there is a major difference in the performance of schemes in the same category over different cycles of the market. While some schemes consistently outperform the corresponding index and beat the category average, over various time frames, others in the same category may fail to do so. That’s a fund manager’s skill working for you.

Performance filter: There are some funds which are consistent good performers while there are others which deliver stellar performances, from time to time. At the time of constructing a portfolio, one should look for consistency in performance rather than sudden bursts in the charts. The former is far more desirable and is achieved through proper selection processes, conviction, understanding and correct judgement at various points. Also, one should choose funds which have at least a 3-year performance history. This will help in validating if the fund is worthwhile to consider investing.

Portfolio construction: In order to make this decision, an investor needs to consider his/her goals and the requirements for cashflows, over time. One should also consider their risk taking ability which would consequently dictate the kind of portfolio that one should construct.The portfolios for different people are hence going to be different. But broad principles apply across the board.

The portfolio stability will need to be ensured through a mix of large-cap funds, index funds and equity-oriented balanced funds. Even a debt-oriented fund with a dash of equity, like in the case of monthly income plans (MIPs) would be suitable here. This is to be the bedrock of the portfolio for most people. What proportion of large-caps and index funds you include in your portfolio will depend on the amount of risk you are willing to take for the sake of returns.

Over this, there can be a satellite portfolio comprising of some aggressive funds like mid- and small-cap funds, value and opportunistic funds, multi-cap funds and so on. The satellite portfolio can also comprise of thematic and sector funds. However, one needs to think through why a thematic/sectoral fund is required in their portfolio. A banking sector fund may be superfluous in a portfolio today as most schemes anyway have exposures to finance sector anywhere between 12-20 per cent. Some sectors like pharma, media and entertainment are extremely vast sectors and exposures in them is best achieved through a sectoral fund. Such sectors, if they make sense in the portfolio, can be invested in through sectoral funds. Again, the allocations towards various categories is best left to individual discretion and their expectations for the future.

In one’s portfolio, there could be a need for commodity, gold and global equity exposure too, especially if the portfolio is large and the need to diversify the portfolio is acute. In such a case, choosing appropriate schemes could add value to the portfolio. These should not be included in the portfolio as a fad.

When choosing schemes to invest one can broadly allocate about 10 per cent in a scheme, going up to 15 per cent in select cases. The fund house allocation should not be more than 20 per cent among all the chosen schemes, going up to 30 per cent in select cases. Allocation in equity schemes should be across time frames. SIPs ensure exactly that. Lumpsum investments can also be invested through systematic transfer, after investing in debt funds to tide over the timing risk.