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Stepwise approach to build your mutual fund portfolio from scratch

Creating a mutual fund portfolio is not an easy task. You must make various considerations before investing in a particular…

By folkduck , in Finance , at October 23, 2023

Creating a mutual fund portfolio is not an easy task. You must make various considerations before investing in a particular mutual fund such as the investment horizon, the risks and rewards involved, etc. Read this article to know four steps that must be followed to build a mutual fund portfolio from scratch.

Break down your financial goals into smaller goals

An investor’s mutual fund portfolio must reflect their financial goals. To build the best mutual fund portfolio, you must constantly analyse whether your investments are serving a larger financial goal. The first step in mutual fund portfolio analysis is breaking down your financial goals into smaller ones and allotting a mutual fund for each smaller goal.

Let us say you wish to invest in mutual funds for two goals: your retirement in 25 years and your child’s higher education in 5 years. Depending on your goal, you can choose an appropriate mix of debt and equity mutual funds and invest systematically for the time period.

Choose your preferred investment method (SIP or lump sum)

There are two ways to invest in a mutual fund online: via a systematic investment plan (SIP) or as a lump sum. If you wish to invest a specific amount every month in a disciplined manner to grow your wealth over time, you must choose the SIP method. An advantage of choosing SIP is that you can always increase the value of your SIP amount during the investment horizon. By investing through SIPs, you can also benefit from rupee cost averaging.

Research the mutual funds online

After selecting the investment method, you must conduct online research about the funds in your mutual fund portfolio. This research involves a comparison of risks versus returns and a detailed analysis of the mutual fund’s expense ratio. The expense ratio of a mutual fund is the amount that is charged by the fund to manage mutual fund expenses. 

Concerning risk vs. reward, you must understand your own risk-taking ability as an investor well before investing. Small cap mutual funds, for example, have a high-risk component and offer higher returns. Mid cap funds, on the other hand, have a moderate risk component and offer moderate-to-high returns. You must select your mutual fund investment based on your risk-versus-reward assessment and the fund’s expense ratio.

Rebalance your portfolio

Finally, you must rebalance your portfolio annually to ensure that your mutual fund investments are helping you meet your financial goals. Often, despite selecting mutual funds after carefully analysing them, certain mutual funds do not perform well over time. You must identify such funds and exit from these investments. This practise is called ‘portfolio rebalancing’. You can diversify with Exchanged-traded funds (ETFs). Gold ETFs are a type of ETF that can help you invest in gold the digital way and can help in rebalancing your portfolio.

Your mutual fund investments must always be analysed with respect to your financial goals. Any mutual fund investment that is not helping you reach your financial goal must be removed from your investment portfolio during rebalancing.

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