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How to build your MF portfolio?

Published on Thu, Jul 27, 2006 at 13:51 | Source : Moneycontrol.com

Updated at Fri, Jul 06, 2007 at 14:45

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Don't be too concentrated or over-diversify

Depending on the corpus, one could invest in an average of 4-7 funds for an equity portfolio and maybe 3-4 funds for the debt and balanced category. Too less a number of funds make your portfolio concentrated and risky. Too many, makes it unmanageable and doesn't really serve the purpose. You need to strike the right balance. (Also read - Low on risk? Here's how to earn better returns)

Also, while selecting the fund, study their portfolio mix and ensure that they are different. If most of them are same, then even with 6-7 funds you won't get the desired diversification.

In order to achieve diversification across asset classes, one could now look at some of the forthcoming options such as real estate fund, gold fund, international fund etc.

Build a suitable mix of equity funds

Apart from allocating your corpus in different asset classes, you need to do some allocation within the equity class. Index/Large Cap funds, Mid-cap/Small cap funds and Sector Funds are the 3 broad sub-categories in which you have to divide your corpus.

Index and Large Cap funds will deliver steady returns, which will be in line with the market performance. In the equity space, they carry lesser risk as compared to mid caps, small caps etc. About 70-80% of your corpus could be allocated to this category. They provide stability to your portfolio. Go for funds with moderate risk and consistent performance.

Your portfolio may need some kicker too. Mid-cap/Small cap funds and Sectors Funds have the potential to provide higher growth (of course with a higher risk). Be prepared for a bumpy ride; and sometimes crash landing too. A 10-20% allocation to this category may be okay. In case of a bad performance, major portion of your corpus is still relatively safe. Large caps will minimise your losses and will also bounce back quickly.

Don't forget the tax aspect

Neglecting to pay tax is bad, but tax planning is not. It can help you to minimize your tax outgo, legally.

Therefore, take care to choose the right option - dividend payout, dividend reinvestment or growth. They may help you to save unnecessary taxes. (Also read - Dividend Reinvestment v/s Growth - Let your taxes decide )

Make sure that you use the post-tax returns in your calculations. Else you may miss your target.

Having built a suitable portfolio, you need to nurture it. You have to regularly feed it with additional investments. You will have to remove the weeds (poor performing funds) periodically. And be patient. It takes time for the tree to grow. But once is has grown, it becomes strong - so you don't have to take too much care; and fruitful - it will give you returns year after year.

- Sanjay Matai

The author is an investment advisor and can be reached at sanjay.matai@moneycontrol.com.

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