Mutual funds are a flexible investment choice, because of the widespread they offer in terms of asset class, risks, investment amounts, and liquidity. But, for a beginner, it can be challenging to take the first step into building a mutual fund portfolio. You can set up your mutual fund portfolio with some basic guiding principles.
A step-by-step guide to building your mutual fund portfolio:
- Understand Your Risk Tolerance: Your risk tolerance is the level of risk you are willing to take while investing in mutual funds. When you determine the amount of risk you can take for your investments, you can decide on the types of funds that are suitable for you. For instance, if you hold a high-risk tolerance, you can have maximum allocation in equities, while debt funds are more suitable for you if you are a risk-averse investor.
- Identification of Goals: Goals are a crucial aspect because all other future decisions would be anchored to them. Through goals, you can decide the investment amount and time horizon, along with several other attributes of investing. Moreover, with your goals aligned, you can tag each mutual fund to a specific financial goal.
- Choose Your Funds: Once you know your financial goals and your risk appetite, you can choose funds that fit in these brackets.
- Asset Allocation: Asset allocation, or the diversification of your investment across different asset classes, is an essential factor that keeps your portfolio balanced. A balanced portfolio is one where the investments are spread out across equity funds, debt funds, hybrid funds and more. This is crucial because different asset classes perform differently based on market conditions, and this ensures that risk is diversified.
- Monitor, Review, and Rebalance: The final step is to monitor, review, and rebalance your investments; here, you need to revisit your investments and determine aspects like diversification, frequency of investing, rebalancing assets and more. You can review the performance of your mutual funds, and if they have been underperforming for a prolonged period, you can switch to better ones.
Disclaimer
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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