Make Your MF Portfolio More Effective

Mutual Funds have begun to find their rightful place in the portfolios of an ever-increasing number of investors in our country, especially those who have adopted SIP as a mechanism to achieve their investment goals. They are gradually waking up to the inherent advantages offered by this wonderful investment option. As is evident, MFs are likely to play an important role in investors’ portfolios and help them achieve investment goals in a Tax-efficient manner. However, it will be imperative for them to follow the right strategies, stay committed to their time horizon and enhance their awareness about various factors that can influence the f inal outcome.  [EasyDNNnews:PaidContentStart]

Here are a few factors that can not only help you begin your investment process well but also go a long way in helping you analyse the performance, ensuring consistency in the portfolio performance and keeping your investment process on track through a defined time horizon. 

Portfolio diversification -
Asset allocation is a method that ensures a proper blend of different asset classes in the portfolio and that too in the right proportion. In other words, asset allocation helps in controlling risk in the portfolio as different asset classes react differently to the factors that impact market conditions such as inflation, geo-political issues, rising or falling interest rates or a market segment coming into or falling out of favour. 

T he key is to understand that asset allocation is different from simple diversification. While having a few funds in the same asset class would provide diversification in your portfolio, it will not control the risk in the manner that an appropriate allocation to different asset classes such as debt, equity, gold, REITs and InvITs would do. 

Mutual funds are the most appropriate vehicle to practise asset allocation successfully. They not only provide diversification but also offer a ‘family of funds’ to suit investment objectives of different age groups with varied time horizons and occupations. Moreover, they also provide opportunities to re-balance the portfolio, which may be required as a result of changes in the circumstances. 

Total return - Total return is a measure that captures the overall performance of your portfolio. It includes all forms of returns, capital gains and Dividends. This measure is expressed as a per cent of the initial investment amount. Therefore, while selecting funds, you must keep an eye on the total return rather than considering either dividend or change in the NAV alone. By doing so, you can be reasonably sure of having a consistent performer in the portfolio and that can go a long way in achieving your investment objectives. 

Beta - ‘Beta’ is the measure of the relative volatility of a mutual fund scheme to its market usually represented by an index. Beta indicates how much the fund will rise or fall in relation to the changes in the index. To measure the impact, the market has the beta of 1 as the index chosen is the measure of the market movement. If the fund has beta of 0.90, it represents that the fund has gone up (or down) by a factor of 0.90 for every 1 per cent change in the market index. A beta of less than 1 results in lower ‘highs’ and higher ‘lows’ than the market. 

In other words, a beta can indicate which mutual fund is likely to perform in a consistent manner over a period and which may go like a merry-go-round. It is always helpful to use beta in matching your risk tolerance to the fund you intend to invest in. 

Take help of a professional - The complexities in investment process and the vagaries of the markets can be incredibly stressful. An advisor can help you in keeping emotions away from your decision-making process and reduce the financial stress by explaining different situations and keeping investments on track through your defined time horizon. 

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