Strike a balance between different MF schemes

There was a time when investors preferring to invest in equity, had to focus merely on stocks as the portfolio performance depended largely on the market performance of the stocks. In the last decade and half, the options have grown manifold and investors have to choose between stocks and mutual funds (MFs).

Within the MF category, the choice of schemes too has grown substantially with over 1,000 schemes being available from over two dozen mutual fund companies. It goes without stating that the task of building a portfolio of mutual fund schemes is not an easy one.

While the choice is plenty, investors need not chase all stories or themes for their investments. In many cases, the difference between the investment principles of various schemes is very limited and hence investors can limit their options to a few schemes.

For instance, if an investor has decided to invest in a diversified scheme, it would not make sense for him to choose 6-8 diversified schemes though most feel comfortable when they have a bigger basket of instruments.

In reality, a smart mutual fund basket will focus on themes, investment strategy, the fund's ability to counter a downtrend, and most importantly, should have schemes which have a track record of good performance. Every downtrend makes this point increasingly relevant, and for longterm investors, this factor is even a necessity.

How does one go about the task of building an MF portfolio?

Start with a diversified fund as it requires minimum management and holds good for a longer period of time because of the investment being made across sectors. This could be as high as 70 percent of the portfolio if the risk appetite of the investor is low.

Over a period of time, the risk-taking ability generally comes down in line with the age of the investor. The risk capabilities also tend to come down when the corpus gets bigger and accounts for a large chunk of the investor's portfolio. Such investors will have to look at inclusion of debt in their portfolio.

In fact, allocation to debt has to increase over a period of time though it is not a bad idea to maintain debt allocation at all times. Not only will this help in better risk management but also allows investors to take the opportunities arising out of a market downtrend.

Take the case of an investor who had a good percentage of funds in debt funds in October 2008. He would have been one of the few who had the ability to take advantage of the steep market correction if his requirement of funds was not short-term.

Since volatility is an integral part of the equity market, investors, irrespective of their age, will benefit by allocating a portion in debt.

The biggest doubt many mutual fund investors have is whether they should opt for a balanced fund or strike a balance in the portfolio through allocation to debt and equity? The answer is yes and no.

A balanced fund invests up to 35 percent in debt and hence is a medium risk portfolio. This would be ideal for an investor who has earning years of more than 15 to 20.

On the contrary, a retired professional, who wishes to allocate a small portion towards equity, might end up with a higher risk portfolio even if he prefers a balanced fund. Hence, balanced fund should be considered a slightly lower risk option for equity investors, and hence should be viewed as a medium risk option for others. On the other hand, investors looking at striking a balance between various funds should stick to vanilla debt products for their debt allocation.

More importantly, an allocation towards a balanced fund is a good stepping stone for first-time investors who haven't had exposure to equity earlier.

Irrespective of the choice of schemes, one needs to build a portfolio of mutual fund schemes according to their risk-taking abilities and investment tenure as mutual funds, like other investment options, have volatility attached to them.

Source:economictimes.com