Investment Objective –
As a rule of the thumb, no investment should be made without an objective in place.
Why are you investing in this scheme? Does it align with your financial goals? Or
is your decision being influenced by suggestions from friends or tips from a news
Before you sign the dotted line, pick up a piece of paper and write down what do
you want to achieve from your investments. Some common objectives are:
Retirement corpus | Children’s education | Buying a house | Regular income
An investment objective will help you select schemes that work together and get
you closer to your goals.
Time horizon –
Returns from investment are usually intricately linked to the time horizon of your
investment. There are funds which are dedicated to long term investments and others
who are designed for investors with a short or medium term investment preference.
Think well and decide how long would you prefer to stay invested.
Your age and risk preference –
A 25 year old investor can afford to take higher risks as compared to a 40 year
old. Being young gives you the opportunity to recover from losses, if any without
disturbing your financial goals. Also, the risk appetite plays an important role
in determining the choice of funds.
Optimal diversification –
The keyword here is optimal. Too much diversification can make it cumbersome to
monitor and track individual scheme’s performance. More often than not, investors
tend to follow the ‘pray and wait’ methodology when they diversify too
much. Not a prudent thing to do. On the other hand, not diversifying enough can
expose your invested capital to risks – the all eggs in one basket phenomenon.
Hence, it is important that an investor diversifies enough to hedge risks while
ensuring that he/ she can monitor the investments regularly.
Number of schemes –
There are many investors who get carried away by the sight of a new investment ‘unicorn’
in the market. These investors typically end up with more than 30-40 different funds
in their portfolio. A classic example of investing without a plan. Most experts
believe that around seven to eight schemes across different asset classes is ideal
for a Mutual fund portfolio.
Invest in multiple fund houses –
Taking a leaf from diversification, it is not just the schemes or the asset classes
that you need to diversify across. Investing all your funds into different schemes
of the same fund house also carries an element of risk. Ensure that you invest across
two or three fund houses. This also allows you to benefit from different investment
strategies followed by these fund houses.
Seek Financial Planning assistance –
Unless you are a finance professional, having updated market information and the
time to analyze performance reports is difficult. A financial advisor spends his/
her time analyzing and studying market behavior and trends. Creating a portfolio
under guidance of such professionals can help you make informed decisions and stick
to your investment objectives.
Monitor regularly –
The idea of creating a portfolio is to enable you to monitor your investments on
a regular basis. However, you must be vary of taking emotion-driven decisions. A
small drop in prices might set the cat among the pigeons in your mind, but it might
be regular behavior of the underlying assets of the scheme. Keep track of the performance
of your investments but also understand the historical performance of the underlying
assets in both bullish and bearish phases of the market.
Remember, a Mutual fund portfolio has to be built in a manner that aligns your financial
needs to the investments made. It should be able to give a bird’s eye view
of your investments and allow you to manage them with ease.