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How To Max Out Your Mutual Fund Portfolio

As a Mutual Fund investor, here are 4 steps you can take in order to stay ahead of the curve.

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Mutual Funds have had a difficult time of late. The capitulation of the equity markets in March sank multi year returns for many funds into the red, while debt funds garnered their own share of bad press amidst fund wind ups and credit defaults. As a Mutual Fund investor, here are 4 steps you can take in order to stay ahead of the curve.

Link it to a Financial Plan

Studies, as well as anecdotal evidence, have suggested that it’s wise to link your Mutual Fund portfolio to a well drafted Financial Plan that details your various life-stage based goals as a road map of sorts. Doing so not only helps you maintain investment and savings discipline, but also automatically aligns your choice of asset class with the investment duration, thereby optimizing portfolio returns. Saving in an ad hoc manner will leave you susceptible to making regular, unplanned drawings on your Mutual Fund portfolio, thereby robbing you of the potential acceleration that could’ve arisen from the future compounding of your returns. A Financial Planner can help you smartly link your Mutual Fund portfolio to your various financial goals, and structure your portfolio accordingly. The benefits of doing so are incontestable.  

Follow an Asset Allocation strategy

Most investors, especially first timers, are clueless about asset allocation and its benefits. While it rings true that asset allocation bears limited significance if you’re just starting out with a small monthly SIP, it becomes increasingly significant as your portfolio size crosses certain thresholds. For instance, you may have started a monthly SIP of Rs. 20,000 into equity funds. Within two years, you’re likely to have accumulated 5 lakhs or more. At this stage, you’ll want to divide your accumulated lump sum amount between equity and fixed income funds, in a ratio that’s in line with your risk appetite and time horizon. Resolutely sticking to your target asset allocation through continual rebalancing is the key to making unemotional investment decisions and not succumbing to some common behavioral traps which may tarnish your long-term returns.

Restrict your number of funds

Commoditized as they are, Mutual Funds are often “bought” in a mindless manner by investors. As a result, many Mutual Fund portfolios start looking like shopping lists over time, with tens of funds present! Holding too many Mutual Fund schemes in the name of “diversification” is a sure-fire way to compromise on the long-term performance of your portfolio. The act of buying too many funds eventually reduced the “alpha” or outperformance quotient of your portfolio, and also makes it difficult to track where your money is and what your precise split between low risk and high-risk assets is at any stage. For best results, invest into no more than 5 equity funds and 5 debt funds at any time. If you’re got more money to invest, bulk up the existing folios or replace the existing funds, if careful evaluation reveals that it’s worth doing so.

Add SIP’s to the mix

SIP’s or Systematic Investment Plans are like rocket fuel for your Mutual Fund portfolio. They help you dispassionately ride out market cycles and earn returns that are consistently higher than savings schemes or life insurance policies, over lengthy timeframes. For best results, start SIP’s in your existing portfolio of schemes, rather than unnecessarily increasing the number of funds that you hold.

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mutual funds personal finance