How to Build Your Mutual Fund Portfolio – Tips for Beginners

Whether adult or minor, salaried or businessman- investing in mutual funds is one of the best financial decisions you’d make, if you haven’t already. Here’s why-

  • Mutual funds offer the highest returns in comparison with other investment options
  • Mutual funds  investments are considered the safest mode of investments
  • Mutual funds are highly flexible, implying that you can invest, re-invest or de-invest your investments basis your needs and financial objectives
  • Mutual funds investments offer liquidity, which means that you can withdraw your funds whenever you wish to, through a simple, hassle-free process; unless you have invested in ELSS (Equity Linked Saving Schemes) which have a lock-in period of 3 years
  • When compared to investments in Fixed Deposits or Recurring Deposits, mutual funds offer returns that are quite high
  • Since returns on mutual funds vary with regard to the fluctuations in the market, it is likely that your investments will witness both highs and lows. Hence, you can be relaxed even when your funds are not offering high returns as the current market situation will definitely change
  • Mutual funds also offer long term security, implying that you can use your gathered funds in case of emergency as well. For instance, in comparison with insurance policies which intend to provide protection in the future, mutual funds investments help in wealth creation as well as security in the long term
  • Additionally, unlike other investment options wherein your money is only kept safe for longer duration of time, investments in mutual funds allow you to appreciate your capital let alone create wealth for you

Mutual funds as an investment avenue offer a multitude of benefits to investors who are actively looking for long term capital appreciation. However, before investing in mutual funds, individuals should have a clear vision of their financial goals and how much they can invest out of their total income. Also, there are numerous factors to look at while selecting a mutual fund and formulating your fund portfolio.

Here is a list of the criteria that investors should consider before choosing the perfect mutual fund for themselves:

  1. Financial goals: Investment in Mutual Funds is done keeping in mind one’s financial objectives. If you’re investing with the purpose of creating a huge corpus of wealth for retirement, children’s education, and any other expenses that require large amounts of money, you can consider small-cap or mid-cap equity mutual funds for investment. They’re risky in the short run, but deliver high returns in the long run.If you’re looking for investment options to park your money for a short term, you can opt for debt funds, which are relatively less risky and offer more liquidity.
  2. Historic performance of the fund: After contemplating on your financial goals and choosing the best mutual fund category that is in line with your goals, you need to select the top performing mutual fund in that specific category. Historic returns of mutual funds is one of the parameters to estimate future returns. If the fund’s 5 year annualized returns are better than its peers and the benchmark returns,  it is considered a good choice for investment.
  3. Assets Under Management (AUM): The higher the value of total assets under management for a fund, higher are the chances of that fund to deliver substantial returns in the long run. The large size of AUM indicates investors’ trust in the fund and allows fund managers to make rational decisions without fearing large outflow of assets from the fund.
  4. Risk Tolerance of the investor: Picking up the right mutual fund category for investment is also based on the investor’s risk appetite. If you’re a conservative investor, it is better to opt for large cap equity funds, debt funds or conservative hybrid funds. However, if you have a substantial risk appetite, you can opt for small-cap equity funds, or aggressive hybrid funds, to earn quality returns. It is always advisable to invest in a diversified set of funds, with significant weightage to both equity and debt funds. This helps in making long term capital appreciation and gives stability to the portfolio.

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