Portfolio is a term often used when talking about investments. It is a collection of the assets and various investments that are held by any individual. These investments may include a range of investments like mutual funds, bonds, gold, real estate, cash, etc.
The term portfolio in relation to mutual funds is the bunch of various types of mutual funds held by the investor. These types may include the basic classification of the funds i.e., equity funds, debt funds, hybrid funds or further classification based on investment goals like dividend funds, fixed income funds or relatively less riskier funds index funds or funds of funds.
A portfolio can be actively managed or passively managed by professional fund managers. The investor can manage their own portfolio as well if they have good working knowledge about the mutual funds and the market fluctuations to maximise their returns.
Types of portfolios
The types of portfolio in case of mutual funds depend on the investment objective of the investor. Investors have to ascertain their risk and return expectations to build their portfolios.
The various types of portfolios in mutual funds are mentioned below.
Income portfolio relates to investments with specific investment goals where investments are made to generate fixed or regular income. Some types of income portfolios are fixed-income funds, dividend funds, floating income funds, etc.
Growth portfolios are different from income portfolios. The main focus of the funds is wealth creation. Investors can invest in mid-cap mutual funds or small cap funds that have the maximum growth potential. Large-cap funds can also be added to the mix to diversify the portfolio at the same time get more or less steady returns on account of such large-cap funds.
This is an investment strategy where the investor actively looks for such companies or assets that are available at relatively lower value or at a bargain. Such investors focus on value oriented companies or assets that have high growth and profit potential but are valued less especially at the time or market slump or downward economic trend. This helps them in building a sound portfolio at a relatively lower cost.
Common investment instruments in a portfolio
As mentioned above, an investment portfolio can have multiple assets ranging from mutual funds, gold, cash, bonds, deposits, etc. while considering a mutual fund portfolio, investors have to consider their investment objective and select the mutual funds accordingly. The most common types of mutual funds found in any portfolio are a healthy mix of large cap funds, mid cap funds, small cap funds, debt funds, hybrid funds. Some investors may even include index funds or fund of funds as a safer bet as compared to actively managed funds.
How to select investments in any portfolio?
There are many points of considerations that have to be factored in while building a portfolio for any investor. Some of such factors are mentioned hereunder.
- Understanding the risk profile: One of the first points of analysis while building a portfolio is understanding your investor profile. Are you comfortable taking some amount of risks or do you prefer a safer avenue where you are sure of the outcome? Based on your risk profile, you would be able to choose investments for your portfolio.
- Decide on a goal for investing: It is very easy to channelise your savings into some sorts of investments. But unless you are sure of what you are investing for, it is very easy to stray away from your goals and investment routine. With a goal comes the time frame in which you want to achieve this goal. This can become further binding on your investment. A goal could anything simple like buying a new laptop in a year or your retirement which may be years away. Goal-based investing can help you choose the right portfolio of mutual funds.
- Choosing the right category of mutual funds: Next step is to choose the right types of mutual fund categories that can meet the returns expectations of the investors according to your goals and risk appetite. The fund managers can use a healthy mix of equity and debt portfolios to build a fund as per the investor’s expectations and can also pick relevant sectors and industries that suit the investor.
- Fund selection within the category: After selecting the broad mutual fund categories, the fund manager has to make sure that the funds selected for the portfolio are among the good performers in each category to maximise investor wealth.
- Monitoring the portfolio: Finally, the most crucial aspect of building a portfolio is monitoring it. The fund manager has to continuously monitor the portfolio to weed out the obsolete or dead investments that may not be generating good returns but are also damaging the overall portfolio value. Such investments can be replaced with better or newer mutual funds that meet the investment profile of the investor.
How many funds should a mutual fund portfolio have?
There is ideally no correct number of funds that have to be included in a mutual fund portfolio. The number varies depending on the investor’s profile, investment objective, budget, etc. However, most experts suggest having maximum 6-8 funds in a portfolio to avoid the risk of over diversification.
Investors can invest in a maximum of 2 funds from each category of equity funds like index funds, large cap funds, mid-cap funds, or small-cap funds. Additionally, the investors can either go for 1 or 2 debt funds or hybrid funds as per their risk-return profile and may add an ELSS fund for tax-saving purposes if not included as part of the equity portfolio.
An unnecessary addition or cluster of funds in a portfolio will not only make it difficult for the investor to manage them but will also lead to over diversification. This will ultimately just increase the cost of investment for the investor as well may reduce the net returns.
There are many cases where the investors are influenced by mutual fund solicitors and excessive marketing which may lead them to select underperforming mutual funds. It is therefore essential to have thorough market knowledge before investing in mutual funds or to entrust the portfolio to professional fund managers who have the sole job of maximising the investor wealth.
FAQs on Mutual Fund Portfolios
1. What are some of the main factors that influence the selection of a mutual fund in any portfolio?
Some of the main factors that influence the selection of a fund in a portfolio are the return risk-return analysis as well as the investment horizon of the investors.
2. What are the two broad categories of portfolios based on the way they are managed?
The two broad categories of portfolios based on the way they are managed are,
Actively managed portfolios – The sole aim of this type of portfolio is to outperform the market and to maximise the returns of the investor.
Passively managed portfolios -This type of portfolio does not have any pressure to outperform the market returns. It rather tracks the underlying index and tries to match the performance with the least tracking errors.
3. Are there any charges levied by fund managers to manage the portfolio of investors?
Yes. the fund houses charge a fee in the form of expense ratio from the investors to manage their funds