“Mutual Fund investments are subject to market risks. Please carefully read all scheme-related documents before investing.”
Does this sound familiar? You must have seen this notice on countless occasions in television commercials, newspapers, and banner and pop-up advertisements on email and web campaigns from asset management companies. This disclaimer appears everywhere because it is the disclaimer that must appear. It is a reminder: You have potential to create wealth through mutual funds, but you also have risks.
But not to worry, with diversified and thoughtful design, you have the opportunity to reduce risks and increase returns. Consider “market risk” the excuse to develop an investment plan and time horizon to invest in a smart and thoughtful investing strategy.
Here at Moneyplantfx, we feel that building a mutual fund portfolio is the best way to create long-term wealth given you have money that is idle. In this blog, let’s break down the steps for creating a good mutual fund portfolio into 8 simple steps.
Before you invest in funds, ask yourself
Your answers will guide you to the best type of funds to invest in. For example:
Overall, mutual fund portfolio returns will be a function of the economy. Various aspects will matter, including government policy, inflation, interest rates and global markets, etc.
To illustrate, investing in a growing economy can normally enhance returns. Timing the market is usually not a realistic factor to consider. However, being aware of the overall economic environment will help you make more educated investment portfolio decisions.
A solid portfolio warrants a good design, One of the most common templates is:
This primary goal is to have the right balance of growth and stability in your portfolio.
The Golden Rule: “Do not put all your eggs in one basket.”
Your portfolio should have:
The right allocation would depend on investment horizon and liquidity requirements. For example:
Always consider a fund’s performance over the past 3 to 5 years. Review the consistency of the fund’s returns, and whether the fund was able to enhance its benchmark and peer fund performance throughout market cycles.
Generally speaking a fund that demonstrates even performance is a safer investment than a fund with extremely high and low results.
Asset Under Management (AUM) is the total value of assets managed by a fund. Typically, a higher AUM suggests strong trust from investors as well as confidence in the market.
A fund with a very high AUM is generally managed by a seasoned fund manager, which means it exudes stability. However, do not follow or track size blindly, just verify that it aligns with your risk profile and investment objectives.
An expense ratio is the annual fee a fund house charges to manage your money on an annual basis. There is a direct relationship between the expense ratio and your returns.
Expense ratio = lower expense ratio = higher returns in your pocket.
The average expense ratio in the industry is approximately 1.5%.
Moving forward, as a rule of thumb, you should always prefer a fund which is reasonable in their expense ratio, particularly if you are investing for the long haul.
The fund may charge an exit load or fees or charges to raised units before a set time period. For instance, if you invest in a fund with a 1% exit load and withdraw your units before one year.
Sometimes most debt funds charge an exit load and that said, it’s a good idea to always check for this criterion when investing, especially if you may want liquidity in the short term.
Creating your own mutual fund portfolio isn’t too complex – it just requires some basic steps: establishing your goals, diversifying, monitoring performance, and being aware of costs.
If you do not have the time to evaluate and research the funds on your own, consider hiring a financial planner to help you create a portfolio that meets your needs.
At Moneyplantfx, we will try to help point you to the best investment decisions. The sooner you begin your planning, the more likely your financial future will be stronger.