How to Build a Profitable Mutual Fund Portfolio? – Know Best Practices

It is very important to Build a Profitable Mutual Fund portfolio, a rather good one, to make sure you achieve your future financial goals.

A mutual fund portfolio is basically the investment you make in multiple mutual fund schemes that fall in line with your risk-taking capacity and your financial planning and goals.

When it comes to investing, many investors get confused about the boundless options of funds.

That being said, this whole can get even more confusing when as an investor, you have to build a Mutual Fund Portfolio. What a portfolio does is that it keeps track of your finances.

It can be used to analyze your financial standing up to date, or buy and sell your existing units if they do not reach your expectations and may cause a massive loss.

Rebalancing will ensure that your portfolio does not entirely depend on either the success of an investment or the failure of it.

Rebalancing is adjusting the scattered assets in your portfolio so you can monitor them and ensure that they perform according to your long-term financial goals.

Concepts to Build a Profitable Mutual Fund Portfolio

Here are the various concepts which you can use to build a powerful & profitable Mutual Fund Portfolio.

Find the list of Concepts here –

1. The Code & Satellite Concept
2. Explore Fund Categories
3. Risk Taking Capacity
4. Asset Allocation
5. Choose only the Best Funds

If you apply these concepts, you can easily build a profitable Mutual Fund Portfolio.

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The Core and Satellite Concept – Build a Profitable Mutual Fund Portfolio

Building a portfolio design keeping the very easy, common as well as tested and proved goals are known as the Core and Satellite Design Concept.

Let us simplify this even more, The Core and Satellite Design concept mean that you begin with the ‘core’ which is the large-cap stock fund and thereby, the largest portion of your portfolio, and then build around the core with your ‘satellite’ funds, which in turn, will represent the comparatively smaller fraction of your portfolio.

The core, just like the name is the backbone and it must comprise 70-90 percent of the entire portfolio. The main aim of the core is to give stability and decent returns.

While the core provides stability, the satellite part of the portfolio is for earning the above-market returns.

The satellite’s main objective is to generate high returns. Before you get all ready to start building your portfolio, you will need to have a blueprint.

Following the blueprint as you build your portfolio can make the process much easier.

Explore Fund Categories – Build a Profitable Mutual Fund Portfolio

Exploring different fund categories is very important before starting to invest. The kind of fund you select should be based on your future goals, risk tolerance, and the duration of the investment.

Once you have finalized the category of the fund you want to invest in, you can start to look at the different available schemes.

As the large-cap stock fund will be your core, the ‘satellites’ which are the different types of funds will complete the entire structure of your mutual fund portfolio.

The satellite funds can be flexible, they can include mid-cap stock, foreign stock, money market funds, bonds, sector funds as well as small-cap funds.

Risk-taking Capacity

You should always be 100% sure of the limit to the risk you are willing to take which is basically your risk tolerance or risk-taking capacity.

When you invest in the market, your risk-taking capacity is the measure of how much shift (ups and downs) in the market value or market risk you can handle.

The kind of funds you choose should be relative to your risk-taking capacity. For instance, if you think your risk tolerance is high, you can go ahead and invest in small-cap stock funds.

But if your risk tolerance is low, large-cap stock funds are the right option for you.

Asset Allocation

It is an investment tactic that balances risk and profit. It does so by allocating the assets of a portfolio following an investor’s goals, risk-taking capacity, and duration of the investment.

The three main classes of assets are equities, fixed incomes, and cash that compromises your portfolio.

Each of them has a different level of risk and profit return. So, if a certain asset is incurring loss the others may incur a profit.

The right asset allocation will result in the level of risk-taking capacity which can either be a high tolerance for risk, a medium tolerance for risk, or a low tolerance for risk.

The risk tolerance affects the percentage of your stocks concerning the bonds and cash.

A high risk-taking capacity will reflect in you having more stocks about bonds and cash and a low risk-taking capacity will result in fewer stocks about bonds and cash.

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Choose only the Best Funds – Build a Mutual Fund Portfolio

After completing the process of asset allocation, the next and the final job that remains is choosing the best funds.

If your risk tolerance is high and you have a huge variety of funds to invest in, you can start by using a fund screener.

A fund screener allows users to choose trading instruments that are suitable for their portfolio. You also have the option to compare performance to a certain benchmark.

Considering the critical qualities of mutual funds such as fees, expenses, and manager tenure is also important.

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How to maintain a good Mutual Fund Portfolio?

Here are the tips to which can be used to maintain a profitable Mutual Fund Portfolio.

Rebalancing the Portfolio

Periodic and timely rebalancing of the portfolio is just as crucial and important as creating one.

This helps investors to maintain the speed with the fluctuating market conditions (rise and fall). There are various approaches to rebalance the portfolio.

In the fixed ratio method, you maintain exposure to equity and debt at a specific ratio. It is based on your risk-taking capacity.

You can always modify the investments to the predetermined ratio. You can do so if the risk tolerance changes significantly due to the conditions in the equity and debt market.

Now, you can do the rebalancing periodically. It can be once a year or once every 6 months on reaching a trigger.

Under the variable-ratio method, the stock portfolio will change continuously. The equity-debt ratio will shift to a new predetermined ratio.

This means it can rise to 10% or even more as compared to what it was in the beginning. This approach needs good understanding and understanding of the future equity market changes.

If the constant prediction of the market change does not seem like your cup of tea, you can always stick to the fixed ratio method.

Under the constant rupee value method, the investor always keeps the value of the stock portfolio constant.

Stock Variation

Having complete knowledge of the stock holdings of your selected mutual fund schemes is very important.

Having thorough knowledge will help you avoid stocks that have the same stock holding pattern or are identical.

This can spoil diversification in your portfolio. And your stocks will result in the same reaction whenever the market becomes volatile.

Investing in stocks with different stock holdings can help decrease the risk.

Choose different AMCs (Asset Management Companies)

Investing all the money in mutual fund schemes with the same asset management company leads to changes in the risk-reward ratio.

It flattens because your fund manager’s approach to any situation will be the same.

But on the contrary, you can invest in mutual funds through different asset management companies. It allows you to achieve a better average when the market turns volatile.

Conclusion – Build a Profitable Mutual Fund Portfolio

The ideal portfolio depends on the investor’s risk tolerance and age that one should always keep these points in mind before deciding what to invest in.

Coming up with a good mutual fund portfolio requires a lot of planning and discipline. If you feel all this is not your forte, you can always take the help of professionals.

They can handle and manage your mutual fund portfolio very efficiently. And if you feel you can handle it, the field is yours.

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