In recent years, mutual funds have become more and more popular in India. You might have seen the campaign by Amfi (Association of Mutual Funds of India), with its tagline, Mutual Funds Sahi Hai. Many investors have turned towards mutual funds via systematic investment planning (SIP) and lump sum investments. This number is on the rise and will continue to rise. Despite this rise in popularity, one of the biggest hurdles for a mutual fund investor is to decide which schemes to invest in, as there are hundreds of schemes to select from. At times, creating a portfolio of a few selected schemes which will help you achieve your financial goals becomes too complicated. So, let me share some tips for creating a mutual fund portfolio based on your risk appetite and investment style.

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Select a few schemes which have had good and consistent performance over the years.

From this list, further shortlist schemes which suit your risk profile, financial goals, and objectives. This is very important because it has been observed that many investors, especially millennials, do not focus on the financial goal and the amount they need in a specific time period when they start investing in mutual fund schemes. The focus is mostly on selecting the top performing schemes on the basis of online search. In my experience of responding to readers’ queries over the years, this is the biggest challenge I have seen. People do not focus on their goals and the amount they need. They focus on the schemes only. Always remember the fact that all the mutual funds schemes which are available are good in their own way. The question you need to answer is whether they are good for you.

Finalise the percentage of money you would invest in each of these schemes

Once you finalise the amount you would be investing in each scheme, you need to create a mechanism to monitor your funds at regular intervals, do a thorough review, and take corrective actions if needed. This step is very critical and you must follow it diligently as mutual fund investments are subject to market risk and volatility. Any news affecting the economy and market at large will have an impact on your portfolio. So, you always need to be diligent and agile while monitoring your portfolio and take actions accordingly.

As far as reallocation is concerned, there is one more important aspect. If you have invested in mutual funds for long-term goals, you need to start moving that money to safer financial products, like bank deposits or debt funds at least two to three years before you actually need that money. Factor these years into your goals as well. This will help avoid the impact of sudden market volatility if any.

Rishabh Parakh is Chief Gardener at Money Plant Consultancy.

First Published:Aug 20, 2019 6:00 AM IST