Tips to build a good mutual fund portfolio

March 13, 2013

Investing requires discipline, even if you regularly put money in mutual funds. Since mutual funds are run by professionals, these are considered good for those who do not have the time and knowledge to invest in shares and bonds. However, building a good mutual fund portfolio requires planning.

Though the ideal portfolio depends upon the person’s risk-taking ability and age, investors must keep some broad points in mind while deciding which funds they should invest in.

A mutual fund portfolio should ideally be divided into two parts – core, for stability and predictability; and satellite, for investments that have a lot of potential but are risky.

IN THE CORE

The core, as the name suggests, is at the backbone and must comprise 70-90 per cent of the portfolio. Its aim is giving stability and decent returns.

Globally, index funds or passively-managed funds are the first choice for the core. An index fund replicates a benchmark index both in portfolio composition and returns. The fund manager does not have any say in stock selection, which eliminates the risk of wrong judgement. The fund management costs, too, are low. Because they invest in multiple stocks, index funds are well-diversified.

“Considering that in India actively-managed funds have outperformed passive funds, which is contrary to global trends, the core should ideally be built around a combination of index and large-cap funds that have a good track record and stable fund management teams,” says Vishal Dhawan, founder and chief financial planner, Plan Ahead Wealth Advisors.

“Ideally, the core portfolio should have a combination of accrual-based funds which follow the hold-to-maturity strategy. These could range from FMPs (fixed maturity plans) of different maturities to short- and medium-term funds with hold-to-maturity strategy,” says Vishal Dhawan.

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SATELLITE PORTFOLIO

The core gives stability while the satellite part of the portfolio is for earning above-market returns. The latter’s objective is to generate high returns through aggressive products such as mid- and small-cap funds, sector funds, thematic funds and international funds.

Duration-based debt funds, which take active interest-rate bets, can also be a part of the satellite portfolio. These do not follow the hold-to-maturity strategy and instead try to profit from capital appreciation. Such funds invest in gilt funds, income funds and floating rate funds.

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REBALANCING PORTFOLIO

Periodic rebalancing (between equity and debt) of the portfolio is as important as creating a good portfolio. This helps investors keep up with the changing market conditions. We discuss different approaches for doing so.

Fixed ratio approach:
In this, you keep exposure to equity and debt at a certain ratio based on your age and risk-taking ability. If this changes significantly due to conditions in equity and debt markets, you shuffle the investments to the pre-determined ratio.

As an example, imagine a portfolio of Rs 10 lakh with 70:30 equitydebt ratio, that is, the equity portfolio is valued at Rs 7 lakh and the debt at Rs 3 lakh. After a year, suppose the equity portfolio rises by 12 per cent to Rs 7.84 lakh while the value of debt goes up by 7 per cent to Rs 3.21 lakh. Clearly, the ideal ratio (70:30) has been altered. It can be balanced by selling stocks worth Rs 10,500 and investing the money in debt.

Variable ratio approach:
Under this, if the value of the stock portfolio changes significantly, the equitydebt ratio shifts to a new predetermined ratio. If the equity-debt ratio was 1:1 at the beginning, and the equity portfolio rises by more than 10 per cent, you can sell a part of your equity holdings and invest it in debt to bring the ratio to, say, 4:6.

Suppose your portfolio of Rs 20 lakh is perfectly balanced between equity and debt. Now, after some time, the equity portfolio rises to Rs 11 lakh and the debt portfolio to Rs 10.6 lakh. If you now want to bring the equity-debt ratio to 4:6, you can sell stocks worth Rs 2.36 lakh and invest the proceeds in debt.

Constant rupee value approach:
Under this, you keep the value of the stock portfolio constant, investing any appreciation in value in debt, or vice versa.

For example, if your equity portfolio is valued at Rs 10 lakh and it rises 10 per cent to Rs 11 lakh, you sell shares worth Rs 1 lakh and invest the money in debt. Similarly, if the portfolio value falls to Rs 9 lakh, you sell Rs 1 lakh worth of debt and invest in equities to keep the value of the stock portfolio at Rs 10 lakh.

Source: Business Today


5 things you must know about your MF statement

October 16, 2008

Your work doesn’t stop at investing in mutual funds. Keeping track of them is as important as deciding where to invest. The account statement helps you do just that.

Once you invest in a mutual fund (MF) scheme, your MF sends you a statement within seven working days that gives details of the investments. Your MF account statement is just like a bank passbook, and gives information on all recent transactions done within a particular folio.

The Securities and Exchange Board of India mandates that in addition to sending account statements to unitholders as and when there is some action in the account (redemption, additional investment or dividend declaration, for instance), MFs also have to send an account statement, at least once a year, for every folio a unitholder has.

What to check

1. Current cost and value

Current cost is the amount you invested in a scheme while current value is the latest market value of your investments as on the date the statement is generated. Also, the price of one unit will be the net asset value (NAV) plus entry load or minus exit load.

2. Folio and account numbers

Make a note of folio and account numbers. Most MFs offer one folio number and several account numbers in the same folio for all investments under the same unitholder combination. This makes for easier tracking all your investments with same MF.

3. Bank details

Check your account number and bank name. If you want to change your bank mandate, fill out the slip at the bottom of your account statement and submit to your fund or agent.

4. PAN details

It is mandatory for you to give the correct Permanent Account Number (PAN), irrespective of the amount invested. Check your PAN mentioned in the account statement and ensure there are no discrepancies.

5. Advisor name

If you have invested through an agent, your agent’s name and code will appear on the statement. However, if you have invested directly, these parts should be left blank on your account statement. Ensure that this has happened.

Source: Rediff