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.
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 Funds||2011 Rank||2012 Rank||2013 Rank||2014 Rank||2015 Rank|
|Escorts Tax Plan||1||21||11||3||2|
|Principal Tax Savings Fund||2||1||9||13||17|
|Birla Sun Life Tax Relief 96||3||6||7||6||3|
|L&T Tax Saver Fund||4||19||6||17||7|
|DSP BlackRock Tax Saver||5||3||16||11||11|
|Kotak Tax Saver Regular Plan||6||8||17||5||20|
|HSBC Tax Saver Equity Fund||7||4||20||10||21|
|Reliance Tax Saver Fund||8||2||19||1||15|
|ICICI Prudential LTerm Equity||9||5||4||12||12|
|SBI Magnum Taxgain Scheme||10||11||13||14||14|
|HDFC Long Term Advantage||11||16||3||19||19|
|IDFC Tax Advantage (ELSS)||12||9||2||20||8|
|Birla Sun Life Tax Plan||13||7||9||9||5|
|L&T Tax Advantage Fund||14||17||15||18||16|
|Birla Sun Life Tax Savings||15||20||21||16||4|
|Quantum Tax Saving Fund||16||13||8||21||18|
|Invesco India Tax Plan||17||14||5||7||10|
|Tata India Tax Savings Fund||18||18||14||15||1|
|Franklin India Taxshield Fund||19||15||18||4||13|
|BNP Paribas LT Equity||20||10||12||8||6|
|Axis Long Term Equity Fund||21||12||1||2||9|
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)
|HDFC Balanced Fund||45%||Balance of equity and debt|
|ICICI Prudential Long Term Plan||20%||Long term debt to get little extra returns|
|ICICI Prudencial Flexible Income Plan||15%||Ultra short term debt for low risk|
|SBI ETF Gold||10%||Exposure to gold|
|SBI Magnum COMMA Fund||10%||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.
|ICICI Prudential Value Discovery Fund||30%||Diversified value stocks|
|SBI Magnum Multicap Fund||30%||Diversified stocks in large, mid and small cap|
|DSP BlackRock Micro Cap Fund||20%||Invests in small and mid cap – high return in long term|
|Mirae Emerging BlueChip||20%||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.
|ICICI Prudential Exports and Other Services Fund||40%||Fund focused on investing in companies in services industry|
|SBI Pharma Fund||30%||Investments in Pharma stocks|
|ICICI Prudential Technology Fund||30%||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.
Investing in terms of portfolio simplifies lot of things. Portfolios help you in
- Diversification (across funds and asset classes)
- Invest in themes
- Invest for a goal
- Simplifying reinvesting
We simplified this concept with mutual funds but these points apply to any investment instruments. Happy building portfolios!