22 Jul 2014

Mutual Funds Part 3/7 - How To Build A Portfolio With Mutual Funds

This is the third article in the mutual fund series. Part 1 and Part 2 were about mutual fund basics and how to start investing in mutual funds. Today I am going to write about building a portfolio with mutual funds in it.
Please remember that before coming to mutual funds one must have the following:

1. An emergency fund - 6 to 8 months of living expenses stashed away. Please refer to my article on emergency fund  here.
2. A PPF account. Article on PPF here.
3. A term life insurance if you have dependents. Article on life insurance here.
4. A medical insurance for you and your dependents.

Now that you have a sound foundation we can start investing in mutual funds. To build a mutual fund portfolio:

1. Start with 2 large cap funds. As and when you build confidence, add small and mid cap funds to your portfolio. Mid and small cap funds are more risky but give your portfolio the kick it requires.
  • Mutual fund investing can start with as low as Rs.5000 and then SIPs can be started for Rs.500 or Rs.1000.
  • SIPs are a good way to start and not think of the market.
2. While choosing mutual funds; take into account the exit load, expense ratio, past performance and comparison against the benchmark. We want returns that beat the benchmark.

3. Invest in equity funds for the long term (at least five to ten years). This is the only formula to generating wealth.

4.  Debt funds provide the safety net to your portfolio. It is good to have some money in debt funds and understand the product thoroughly. Remember that you can lose money in debt funds also and it will never generate equity like returns.

5. The market returns will fluctuate. Just stay invested even if the market goes down. When the boom happens, you will be happy.

6. Diversify with about 6 to 8 funds. More than this number in the same category will not provide any further benefits in terms of diversification.

7. Nobody can time the market. Anybody who claims to time the market is clearly lying. Try not to time and just continue contributing in the form of SIPs.

 Yes, one can lose money in mutual funds but when investing for the long term it is the way to generate inflation beating returns.

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