A well built Mutual Fund Portfolio will give you peace of mind even during uncertain times. And making a good, resilient Mutual Fund Portfolio is no rocket science. So in this article, we discuss how you can make a Mutual Fund Portfolio that will be resilient during the down cycles of the market and will also allow you to participate and take advantage of a growing economy.
Asset Allocation and Goals play an important role when it comes to making a financial portfolio. There are a few rules, or we might say ‘guidelines’, in personal finance which should be followed when making a Mutual Fund Portfolio. These rules help you with Asset Allocation, Risk Distribution and achieving your ultimate goal – Wealth Generation.
- Before you Make a Mutual Fund Portfolio
- How to Make a Good Mutual Fund Portfolio?
- How to apply 70-20-10 Rule while making a Mutual Fund Portfolio?
- How to apply 60-30-10 Rule while making a Mutual Fund Portfolio?
- How to integrate an ELSS Fund into a Mutual Fund Portfolio?
Things to Consider Before Making a Mutual Fund Portfolio
Few things you need to remember before you start making a Mutual Fund Portfolio.
Things to Remember Before Making a Mutual Fund Portfolio
- Always associate a Goal with your Investment.
Goal-Oriented Investment helps you keep track of your investment, and it will also motivate you to rethink your decisions when your investment is getting off track.
- Proper Use of an Investment Vehicle.
If an Investment Instrument was made for long term wealth creation, never use that instrument for your short term goals and vice versa. It ‘might’ or ‘will’ cause severe, irrecoverable capital erosion.
- Proper Asset Allocation.
Just like a healthy human body needs a balanced diet to function properly. A well balanced and proper Asset Allocation is also necessary for your investment to lead a healthy financial life.
- Proper Risk Distribution of your Portfolio.
A large amount of Resilient, Defensive Assets in your portfolio will make it weather all kinds of troubles, but those assets will also refrain your portfolio from participating in a growing economy. While a large number of High-Risk Assets will help you take advantage of a growing economy, it also has the power to completely erode your investment capital within days, that too, without you even knowing.
- Knowing your Own Risk Tolerance.
Knowing your own risk tolerance is vital for long term wealth generation. You have to have control over your emotions. FEAR and GREED are your worst enemy when it comes to investment.
If you know that you will be panicking if your investment value went below 30% at any point in time, then Equity Investment which has an inherent substantial market risk is not for you.
The COVID-19 Pandemic Correction was the biggest example.
- Age of the Investor.
The age of the Investor also plays an important role while making a portfolio.
For a young, healthy 30 Years old investor, Small Cap Mutual Funds might find a place in his/her portfolio, as they have a long working life ahead to recover if they incur any loss. But for a 65 Years old retiree, a Small Cap Mutual Fund is a strictly “NO-GO ZONE”
How to Make a Good Mutual Fund Portfolio?
Now let us answer the question you came here for.
How can you make a Mutual Fund Portfolio which will be resilient during the thunderstorms like the 2020 Pandemic and will also allow you to take advantage of a growing economy?
The answer to this question lies in 2 Rules. Or we might say, 1 Main Rule and the other rule is an extension of the Main Rule.
The Rules are –
- 70-20-10 Rule
- 60-30-10 Rule
How to apply the 70-20-10 Rule while making a Mutual Fund Portfolio?
The 70-20-10 Rule says that you need to invest 70 Percent of your Investment Capital into Large Cap Mutual Funds, 20 Percent into Mid Cap Mutual Funds and 10 Percent into Small Cap Mutual Funds.
A Mutual Fund Portfolio based on the 70-20-10 Rule will be a very Resilient Portfolio, which will weather almost all kinds of market down cycles. But it will also allow you to grow your money at a fast pace.
The 70 Percent investment into Large Cap Mutual Funds makes the base of the portfolio strong while 20 Percent and 10 Percent investment in Mid Cap and Small Cap Mutual Fund respectively, give the portfolio the acceleration it needs to grow the investor’s money at a rapid rate.
But we at Money Premier personally think, that for most of the Average Retail Investors, Small Cap Mutual Fund will only make the portfolio riskier while bringing very little upside to the table. So we would suggest, you drop the Small Cap Fund altogether and divide the last 10 Percent and make a 75 Percent Large Cap Fund and 25 Percent Mid Cap Fund portfolio. Or if you want to press the accelerator pedal a bit hard, then make a 70 Percent Large Cap and 30 Percent Mid Cap Mutual Fund portfolio.
But again, as discussed earlier age plays an important role while making an Equity Portfolio, whether it is Stocks or Mutual Funds. A Young investor can afford to take the extra 10 Percent risk of Small Cap Mutual Funds while an aged investor should not.
As said earlier, these are not hard and fast rules. These are guidelines to make your portfolio stable throughout its lifetime. You can tweak these rules according to your situation.
Now the 60-30-10 Rule is an aggressive extension of the above mentioned Main Rule.
How to apply the 60-30-10 Rule while making a Mutual Fund Portfolio?
Just like the 70-20-10 Rule, the 60-30-10 Rule states that you should invest 60 Percent of your Investment Capital in a Large Cap Mutual Fund, 30 Percent in Mid Cap Mutual Fund and 10 Percent in a Small Cap Fund.
The 10 Percent difference in allocation in the Mid Cap Fund makes the portfolio much more aggressive. But it also makes it more susceptible to a market down cycle.
The more capital you allocate in Mid Cap and Small Cap Funds, the more volatile the whole portfolio becomes.
As we discussed earlier, Small Cap Mutual Funds are not for everyone. Small-Cap Stocks, as well as Mutual Funds, are very volatile. They tend to have a High Beta value, which means the fund will rise and fall more compared to the benchmark indices.
You can make your portfolio even more aggressive by dropping the Large Cap Mutual Fund and replacing it with a Large and Mid Cap Mutual Fund. But again, we will remind you that –
How to integrate an ELSS Fund into a Mutual Fund Portfolio?
You can even integrate an ELSS Fund into the portfolio while following these rules. You can choose a Large Cap ELSS Fund and divide the 70 Percent Asset Allocation (or 60 Percent if you want to be an Aggressive Investor) between a Large Cap ELSS Fund and a regular Large Cap Fund.
That is, 35 Percent of the investment goes to a Large Cap ELSS Fund and another 35 Percent into a regular Large Cap Fund (if you are using the 70-20-10 rule).
While we at Money Premier, always try to use an Investment Instrument for what it was meant for.
The main function of an ELSS Fund is not wealth generation but Tax Savings. Wealth Generation is a Secondary benefit of an ELSS Fund. We have talked about this topic in more detail here. We had a very in-depth discussion about ELSS Fund in that article.
Money Premier Tips
If you are a Long Term Investor and your Investment Horizon is more than 10 Years, then we suggest you keep 10 to 20 Percent of your Total Investment Value in a very easy-to-access, liquid asset like a high-interest bank account. So you can buy more during a recession or a market down cycle.
For Example –
If you have Rs. 50 Lakhs invested in the market, then keep at least Rs. 5 Lakhs in a Liquid Fund or a high-interest bank account like the Kotak 811 Saving Account.
The COVID-19 dip was the perfect time for a long term investor to scoop more assets at a throw-away price.
But in order to do that you need to have a disciplined financial life.
These Rules or Guidelines are malleable in nature. You can bend them to a certain degree to make them fit your situation.
The age of the Investor plays an important role when making a Mutual Fund Portfolio following these rules. A 25 Years old Investor can stomach a 30% drop in his/her Investment Value, but for a 50 Years old, it won’t be so easy.
Consistency is also important when you are making an MF Portfolio.
Continuously accumulating Mutual Fund Units using SIP is the best way to generate wealth in the long term. No one can predict the future, the best way to mitigate the risk of “Future Uncertainty”, is by averaging out your buying cost continuously.
We at Money Premier are not suggesting you drop the idea of investing in a Small Cap Mutual Fund completely, but to make you aware of the risks that come with investing in Small Cap Mutual Fund. Small-Cap Mutual Fund can be a vital part of your portfolio if understood and handled correctly.
Equity Investment might seem easy, and sometimes it is made to look easy, but it is not. It takes Knowledge, Experience and Patience to become a successful Investor. And these are not talents but skills, which means these traits can be learned.
If you feel uncomfortable handling Equity Investment Instruments, then we would ask you to take the help of a professional financial advisor.
We hope this article was informative for you. If you have any further questions or queries, do ask us in the comment section. This type of informative piece takes quite an amount of energy, time and research so, if you kindly upvote by using the button below, it motivates us to make more such articles. So in the end, we will say, Good Luck and Happy Investing. 👍
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