Things to keep in mind while building a MF portfolio

For amateur investors mutual fund is a good investment avenue for the long-term. In an interview to CNBC-TV18, Lovaii Navlakhi of International Money Matters says, when one is building up a mutual fund portfolio, not all of the money should go into equity. “Once you have decided what component goes into equity and you are building up portfolio through mutual funds, the core part of the portfolio needs to be largecap funds. It could be 60-75% of the portfolio and the balance can go into midcap or multi-cap funds,” he advises. 

Thematic fund, he says, is something that only experienced investors should do because that requires a little bit of timing, and some bit of tactical play.

Below is the edited transcript of his interview on CNBC-TV18. Also watch the accompanying video.

Q: Investor can invest Rs 2 lakh as lump sum per year. He wants Rs 5-6 crore after 25 years. What’s the advice that you would give?

A: I am glad that he mentioned that he has a 25-year time horizon. That’s precisely the time that we require to help him meet that goal. If he is able to invest Rs 2 lakh per year and I believe he is already doing another investment in the debt schemes of Rs 1.88 lakh per year then it is possible that with a portfolio return of about 12-12.5%, which has the debt component earning 8% and the equity component earning say 15%, he will meet his goals in 25 years. But he needs to keep in mind that that’s the time horizon that he has to target.

Basically, in equity investment, it definitely makes sense today to look at over five-seven-year time horizon minimum. The type of schemes for that Rs 2 lakh, if I was to suggest to him, would be more in the largecap space and maybe couple of schemes in the midcap space. So, I would recommend DSP Blackrock Top 100, HDFC Midcap Opportunities and ICICI Pru Discovery, which is more a value based sort of buy. One sort of warning to him is that at this current point in time, with markets being pretty volatile, I wouldn’t recommend that you put the entire Rs 2 lakh at one go. To stagger that and invest would be a better thing to do.

Q: Investor can invest Rs 20,000 per year. How should he allocate the money?

A: He has already decided that he wants to be in a balanced fund. I presume he thinks that a balanced fund will sort of reduce his risk and will not be 100% in equity. But he must know that the balanced funds typically have more than 75-80% of their portfolio in equity. So, he may not be able to cut too much of risk.

In terms of funds, he did mention HDFC Prudence, it’s a good fund. There is also the Franklin Templeton India Balanced Fund. There is a DSP Blackrock Balanced Fund. These are all good balanced funds. But I think it’s very important to understand objective. So, how much money does he want in what timeframe, what is the amount is he going to put in and whether the balanced fund will help him achieve that goal. I think it’s much better, if he sort of answers some question in terms of what his goals are.

Let me try and answer this question a little more generically. When you are building up a mutual fund portfolio, not all of the money should go into equity.

Once you have decided what component goes into equity and you are building up portfolio through mutual funds, the core part of the portfolio needs to be largecap funds. It could be 60-75% of the portfolio and the balance can go into midcap or multi-cap funds.

Thematic fund is something that only experienced investors should do because that requires a little bit of timing, and some bit of tactical play. There will be periods when FMCG will do much better, there will be times when banking will do better and there will be times when pharma does better. So, you should be in a position to get in get out of these funds or atleast cut your risk, when you find that the downside is happening very sharply.