How to Build a Portfolio in Mutual Funds, Building Your Mutual Fund Portfolio

A plan is needed to build a mutual fund portfolio and it depends largely on personal preferences. There is no solution to "one size fits all" and the money to invest in it will depend on your financial goals and objectives. Therefore defining your financial goals and objectives is probably the first and most important step towards building your mutual fund portfolio.

Before making any investment, keep clear on your goals, why you are investing, how much you need to invest and how much time you have to spend to realize your goals.

Financial goals can be anything to save for your next trip abroad, buying a house or planning your retirement. List your financial goals and determine how long you can hold your investment.

The time given for the investment to grow will determine success or failure in achieving your set financial goals or amount. For example, if you are 30 years old and your investment objective is to plan for retirement, then it essentially means that you have another 30 years of window to save and invest (assuming that you 60 years will be retired) In this case, the option of mutual fund schemes will be very different if you are 50 years old and only 10 years more to achieve your financial goals. It will also affect your ability to take risks.

The appetite of your risk also determines what type of mutual fund portfolio you should build. The time connects the comfort of taking your risk. In the above example, in 30 years, you may be more comfortable investing in high risk, high returns mutual funds and ups and downs of markets. On the other hand, you may not be ready to take high risk and you may be foxed to save your investment, if you have only 10 years to invest for your retirement.

Core and Satellite Strategies

The most effective way to build a mutual fund portfolio is through core and satellite strategies.

A core and satellite strategy basically means dividing your mutual fund portfolio into one core and one satellite into two parts. The purpose of the core is to provide consistency while giving stable returns to your mutual fund. The objective of the satellite part is to invest in high risk mutual fund schemes that have the potential to deliver high return.

Core	Satellite
Forms70-90% of the mutual fund portfolio Has low to medium risk investments	Should constitute the balance 10-30% Has high risk investments
Provides stability while generating steady returns	Provides diversity and high return potential
Mostly constitutes funds investing in large-cap stocks, index funds, etc...	Looks at funds investing in mid-cap or small-cap stocks, sector funds, thematic funds, etc...
Addresses long-term financial goals and time horizon	Can be used to address short-term financial objectives

Once you have created your mutual fund portfolio, it is important to review your portfolio periodically to ensure that the composition of the core and the satellite continues over time. You should also make sure that your portfolio is diverse and offers strong after-tax returns.