The Most Authentic Guide on Personal Finance and Investments

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Ten Features of a Perfect Mutual Fund Portfolio

There is simply no alternative to mutual funds. It is the perfect investment option for almost all investors.

- Among the best in terms of returns
- Highly liquid so that you have instant access to your money
- Enjoys extremely beneficial tax policy, thus giving best post-tax returns
- Best product in terms of the risk-reward ratio  
- Caters to shortest of the short-term needs, to the longest of the long-term requirements

Unfortunately, due to many misconceptions and myths, most people are not able to make the best of this perfect investment.

So, presented below, is the short and simple checklist of the characteristics of an ideal mutual fund portfolio.

One. Based on your financial profile (in terms of the investment objectives, time-frame, risk appetite, tax status and liquidity needs), your portfolio should be suitably diversified across equity funds, debt funds and gold funds.

Two. The equity portion should be suitably diversified to have around 5 to 7 large-cap / diversified funds, 3 to 4 mid / small-cap funds and 2 to 3 sector / thematic funds... all with long term proven track record (in short, no NFOs or New Fund Offers).

Three. Further, the equity portion should be balanced, in terms of risk, with around 50-60% corpus in large-cap / diversified funds, 15-35% in mid / small-cap funds and 10-15% in sector / thematic funds.

Four. The equity portfolio should be built gradually, month after month, year after year through Systematic Investment Planning. Lump sum investing in equity should be avoided at all costs.

Five. Ideally, all equity funds should be held for long term i.e. not less than 5 to 7 years (subject, of course, to they continuing to deliver above-average performance). Also, avoid Dividend Option. Instead let your portfolio enjoy the benefits of compounding through the Growth option.

Six. The debt portfolio should have an appropriate mix of long-term and short-term funds.

Seven. Since debt funds are susceptible to interest-rate risk, they should be suitably restructured from time to time, to take advantage of (or precaution against) the interest rate cycles.

Eight. As the returns from debt funds are stable and steady (unlike the volatile equity funds), the debt portfolio can be constructed both through SIP and lump-sum investing.

Nine. Gold ETF is the most appropriate option among various types of gold funds.

Ten. The portfolio should also be spread and diversified across the top performing 5 to 8 Mutual Fund Companies, so as to benefit from different fund management styles.

Do this and you can surely hope to make some very good and tax efficient returns from your mutual fund portfolio.

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