Most people who do not seek the advice of professional advisors, usually tend to look at the last one-month or one-year returns and go for mutual funds that are relatively giving higher returns in comparison with their peers.
However, this is a rather simplistic approach. Selecting your funds should be based on a lot of factors, such as your investment goals, tenure and risk tolerance, among others. Here is a guide on what to consider when choosing a portfolio of funds and how to maintain it.
Step I: Portfolio Allocation
To start with, you have to decide your overall portfolio allocation. This is basically about deciding how much you want to invest in equity, debt, gold, and so on. Zeroing in on a particular fund is the subsequent step. Your portfolio allocation will depend on your investment objectives, risk appetite, and investment time horizon.
Let us say, you decide on an allocation ratio of 60:30:10 in equity, debt and gold. This allocation ratio will provide you with the basic framework on which you will proceed with the next step towards selecting the funds of your choice towards building your portfolio.
Step II: Category Allocation
There are multiple fund categories available, each with their own nuances. You have to understand either all the categories, or to keep life simple, know a few of them which you will go for. There are 11 equity fund categories, 16 debt categories, and six hybrid categories. Here are some relevant ones.
Equity Large-Cap: Large-cap stocks are the top 100 stocks according to market capitalisation. In other words, these are the leading 100 companies of the country. These are relatively less volatile than, say, small-cap stocks, but are subject to the usual market movements.
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