How to build your mutual fund portfolio to achieve your financial goals in time? Here are key steps

Most Indians get introduced to equity funds via the tax-saving ELSS fund route. But what next? And what if you don’t need ELSS funds for tax savings?

Then how can you build a proper mutual fund portfolio?

One approach that people take is to pick last year’s table-topping funds and start investing in it. That is not the right way to do it. Last year’s winners may not repeat their winnings this year. But that is not the most important point anyway in fund selection.

You need to start in the right direction.

And it starts with your financial goals.

I have been a long-time proponent of goal-based investing. And that is because it is the most intuitive and practical approach to investing. People have different types of goals and these goals require different approaches and fund types.

Most people don’t know how to select funds and mix them to create a proper portfolio. They invest here and there and as a result, end up eventually with a directionless portfolio of random products that goes nowhere.

So how to solve this problem?

How to build your MF portfolio?

And how to do it correctly?

In my view, this is best illustrated using a simple example.

Suppose you are a 35-year-old who very recently realised something odd. After years of working and starting to earn well, you still don’t have much to show for all of it. You do have an assortment of investment products which have accumulated over the years. But the portfolio looks like a mess and is full of clutter. You have absolutely no clue about what is working and what is not in your portfolio. You are also not clear whether you are saving properly for all your goals or not and whether you are on track to achieve those goals or not.

Let’s try to address your situation and simultaneously, show you how to build your MF portfolio.

Furthering our example, let’s say you have 4 major goals that you are targeting:

• House downpayment in 2-3 years
• Son’s higher education in 9 years
• Daughter’s higher education in 11 years
• Retirement at 55-58 in 20-23 years

You did some calculations about the right SIP amount and found out how much you need to invest for each of your goals and what is the right allocation for each goal. Here is what you found:

• House downpayment in 2-3 years - ₹40,000 monthly in 100% Debt
• For son’s higher education in 9 years - ₹15,000 monthly at 60% Equity and 40% Debt
• For daughter’s higher education in 11 years - ₹12,000 monthly at 60% Equity and 40% Debt
• For Retirement in 20+ years - ₹25,000 monthly at 70% Equity and 30% Debt

Why and how is the allocation for each of these goals chosen?

The idea is simple. For your long-term goals, more equity is advisable as it helps generate inflation-beating returns. For the short-term goals, equity is not suited and hence, it’s handled via pure debt funds. As for the medium-term goals, a sort of balanced approach of equity and debt is chosen.

Now comes the tricky part.

How to pick the right mutual funds?

Let’s go goal by goal -

• House Downpayment Goal (2-3 years) - As suggested earlier, this near-term goal will be managed purely via debt instruments. So, to invest ₹40,000 monthly, you can simply choose 1 fund from categories like Ultra-Short Duration or Low Duration funds. That’s it.
• Son & Daughter’s Higher Education Goal (9-11 years) - Both goals have similar nature and timelines. So at least initially, we can handle them together. For investing ₹15,000 (for son) and ₹12,000 (for daughter), you can do a combined monthly SIP of ₹27,000 in any of the following 2 ways. One option is to simply pick 1 Aggressive Hybrid Fund (which holds about 65% equity and the rest in debt) or a Dynamic Asset Allocation fund. Another option is to invest about 65-70% in a Flexicap fund and the rest 30-35% in a Short Duration fund.
• Retirement (20+ years) - As per the calculations, you have to invest about ₹25,000 monthly. And equity allocation should be about 70%. So first, for the debt portion, use your EPF or PPF. For the equity part, you should pick 2-3 funds from categories like Large Cap Index funds, Flexi Cap or Large & Midcap funds and Midcap funds.

That’s it. That is all you need to build your mutual fund portfolio from the ground up. No need for several schemes from the same category which results in unnecessary overlaps in the name of diversification.

Also, once you set your funds in order, don’t think it’s a buy-&-forget portfolio. No sir. You have to review your portfolio at least once every year. This is to ensure that your funds are still performing in line with expectations and close to benchmarks and peer groups. If they aren’t, and for a long time, then it’s time to make changes. Also, after a few years, your goal-portfolio allocation might go haywire due to market movements. So, you also need to rebalance once every 1-2 years to bring the portfolio back on track.
 

Dev Ashish is a SEBI-Registered Investment Advisor and Founder (Stable Investor). He provides fee-only financial planning and investment advisory services to small and HNI clients across India.