5 model mutual fund portfolios for different investor types

5 model mutual fund portfolios for different investor types

Want to invest in mutual funds but don’t know which schemes to buy? Already invested in mutual funds but not sure if they are appropriate? Hold a large number of schemes and want to cut them down to a manageable number?

If these issues are troubling you, Here we have designed five model fund portfolios for investors of different risk profiles and financial situations.

These five portfolios cover almost the entire spectrum of the investing population, ranging from aggressive investors who are willing to live with volatility to conservative investors who want reasonable growth with minimal risk. We also have a portfolio for retirees looking for returns that can beat inflation and provide regular income from the investments. Each of these portfolios have five funds. The funds have been chosen on the basis of their star rating by Value Research.

Choosing a portfolio

Which of these portfolios will suit you? As a first step, you must know your risk appetite, because this will determine your asset allocation and the type of funds that fit your profile. If the market volatility does not bother you and your investment tenure is more than 8-10 years, go for the Wealth Maximiser portfolio that invests entirely in equity funds and has a decidedly mid- and small-cap orientation. These funds have given spectacular returns in recent years, but also carry high risks.

Not everyone is comfortable with the high returns that accompany high risks. Those seeking comparatively stable but lower returns should go for the Stable Wealth portfolio that adopts a balanced approach and puts only 60-65% in equities. However, if the thought of losing money is completely unacceptable to you, go for the conservative Wealth Secure portfolio where the equity allocation is just 20-25% of the corpus. There’s no point in taking risks to earn high returns if it gives you sleepless nights and ruins your personal life.

We have included a tax saving fund in every portfolio because we believe the ELSS category is an ideal way to save tax for equity investors. There is a 3-year lockin period, which actually works in favour of the investor by keeping him invested even during periods of high volatility.

He can neither be tempted to get out when markets shoot up, nor lose his nerve and redeem when stocks prices head southwards. “In some cases, the three-year lockin period of ELSS funds actually inculcates investing discipline in individuals. They realise the benefits of taking a longer term perspective,” says Delhi-based investment consultant Tamanna Varma.

The SIP approach

Most investors are familiar with the advantages and convenience of investing in mutual funds through SIPs. We have also recommended the SIP approach in our model portfolios. But don’t expect this to be a foolproof safeguard against losses. SIP only reduce the risk—they do not remove it altogether. An equity fund portfolio will certainly slip into the red if the markets recede.

 

Mutual fund suitability matrix
Find out where each category of mutual funds fits into the matrix

Therefore, the returns from these portfolios will depend, in a large measure, on the investing discipline of the individual. Domestic investors are pouring money into equity funds, and SIPs worth Rs 6,000 crore flow in every month. But some experts fear this can quickly change if markets witness a sharp decline.

 In an interview to Economic Times last month, I.V. Subramaniam, CIO of Quantum Mutual Fund, said “If there is a correction, domestic investors will falter a little, step back and be shy to invest again.” The small investor’s biggest problem is that she loses her nerve when markets tumble and stops her SIPs. This can be a costly mistake. It prevents the investor from buying at lower prices, defeating the very purpose of the SIP arrangement.

Reviewing and rebalancing

The investor’s work doesn’t stop here. Though you do not have to check your portfolio on a daily or weekly basis, it is necessary to evaluate it periodically and see if it is on track.

One must regularly monitor the progress of these portfolios and compare the performance of individual funds against their respective benchmarks. Underperforming schemes should be shown the door and replaced with more promising funds. The portfolios should also be rebalanced once in a year to ensure that the risk profile does not change.

We hope you will find these model fund portfolios in the next article useful.


Happy investing.
Source: Economictimes.com