A mutual fund portfolio is nothing but a group of mutual funds that you invest in. For example if I have invested in three funds, my portfolio is combination of these funds with their relative weightage. You can have any kind of investment in your portfolio, including stocks, bonds, gold or real estate.

Mutual funds allow you to invest in different asset class without the need to get into complication of transactions. Hence for simplicity lets assume that a portfolio consists of just the mutual funds.

A mutual fund is already diversified across multiple stocks, why do I need a portfolio?

Yes, Mutual fund is already diversified across stocks. But diversification across stocks is not enough. Below points explain how a portfolio helps you in 4 ways.

1. Diversification

A mutual fund portfolio helps you in diversifying across funds (fund managers) and different asset classes (fund categories)

Diversification across funds

When you invest in a mutual fund, you are effectively betting on two things – the mutual fund category and the fund manager. Given a category, a portfolio of mutual funds help you in diversifying across the funds.

In spite of loads of data available about a fund and its past performance, it is almost impossible to predict the performance of a mutual fund in future.

Consider this table below – how performance of tax saving schemes have changes in last 5 years. It is almost impossible to find the best performing scheme for the next year.

ELSS (Tax Saving) Mutual Funds2011 Rank2012 Rank2013 Rank2014 Rank2015 Rank
Escorts Tax Plan1211132
Principal Tax Savings Fund2191317
Birla Sun Life Tax Relief 9636763
L&T Tax Saver Fund4196177
DSP BlackRock Tax Saver53161111
Kotak Tax Saver Regular Plan6817520
HSBC Tax Saver Equity Fund74201021
Reliance Tax Saver Fund8219115
ICICI Prudential LTerm Equity9541212
SBI Magnum Taxgain Scheme1011131414
HDFC Long Term Advantage111631919
IDFC Tax Advantage (ELSS)1292208
Birla Sun Life Tax Plan137995
L&T Tax Advantage Fund1417151816
Birla Sun Life Tax Savings152021164
Quantum Tax Saving Fund161382118
Invesco India Tax Plan17145710
Tata India Tax Savings Fund181814151
Franklin India Taxshield Fund191518413
BNP Paribas LT Equity20101286
Axis Long Term Equity Fund2112129
Diversification Across Assets

Mutual Fund Portfolios also help you plan and manage asset allocation properly. Asset allocation is nothing but deciding what each asset – equity, debt, gold etc – gets what percentage of your investments. In long run asset allocation plays a bigger role in your returns than picking individual funds or stocks.

Because of macro economic cycles, different asset classes perform differently at different times. Sometimes, you will hear how demonetization will spur growth of debt funds. In last two years debt funds have outperformed equity funds. Similarly, small cap and mid cap stocks have given huge returns to investors. For passive investors (or even for active investors), it is very difficult to predict what will grow faster in future. Diversified asset allocation helps you ride through different economic cycles.

Here is an example of All-weather diversified portfolio (this is just for illustration and not necessary the best portfolio for someone)

Mutual FundsWeightComment
HDFC Balanced Fund45%Balance of equity and debt
ICICI Prudential Long Term Plan20%Long term debt to get little extra returns
ICICI Prudencial Flexible Income Plan15%Ultra short term debt for low risk
SBI ETF Gold10%Exposure to gold
SBI Magnum COMMA Fund10%Exposure to commodities

2. Setting a goal

You can assign a gaol to your portfolio and track if that is meeting your objective. For instance you can build a mutual fund portfolio for your retirement. Or your kids education.

Here is an example of a mutual fund portfolio for an investor who wants to invest for kid’s college education in 10 years.

Mutual FundsWeightComment
ICICI Prudential Value Discovery Fund30%Diversified value stocks
SBI Magnum Multicap Fund30%Diversified stocks in large, mid and small cap
DSP BlackRock Micro Cap Fund20%Invests in small and mid cap – high return in long term
Mirae Emerging BlueChip20%High risk high return

3. Investing in themes

Portfolios also help you invest in a theme you believe in. Take an example – assume that you believe that value of dollar will keep rising against rupees in coming years. You can easily create a set of funds with companies focused on export sectors. Here is a sample mutual fund portfolio created for investing in this theme.

Mutual FundsWeightComment
ICICI Prudential Exports and Other Services Fund40%Fund focused on investing in companies in services industry
SBI Pharma Fund30%Investments in Pharma stocks
ICICI Prudential Technology Fund30%Investments in Technology stocks

4. Ease of re-investing

The last reason and one of the most important reasons why you need to build a portfolio – a well defined portfolio makes it easy to keep reinvesting without worrying about the asset allocation every time you transact. Most of the investors procrastinate investing because at every transaction you will have to decide which scheme to buy. A mutual fund portfolio makes it easy because you had already decided funds and their weightage earlier. So additional investments become much easier through portfolios.

Summary

Investing in terms of portfolio simplifies lot of things. Portfolios help you in

  1. Diversification (across funds and asset classes)
  2. Invest in themes
  3. Invest for a goal
  4. Simplifying reinvesting

We simplified this concept with mutual funds but these points apply to any investment instruments. Happy building portfolios!