How does one build a good portfolio of mutual funds?



I am 33 years and unfortunately have started investing in mutual funds without learning the details. I just looked for the funds which have given good returns for last 3-5 years and are of low risk category (according to some websites where I could compare performances). Now I understand there is a lot to understand before investing in mutual funds. I have started SIP in HDFC Top200, hdfc-prudence, idfc prem eqity-A, birla sunlife dividend yield plus, uti dividend yield, hdfc taxsaver, sbi magnum taxgain in ratio– 3:1:2:1:2:2:2 (all in growth option, except taxgain, which is dividend reinvestment). I have not made detailed plan for generation of money for future but thought that in any case the ultimate aim is to accumulate enough money for purchasing a flat, provide for educational expenses for my child and his marriage, and to have enough for my (and for my wife) retired life. I will retire at 60yrs. Each month I can invest about 15k(excluding provident fund where I save 3k permonth). Given this, can you tell me whether my current portfolio is good or bad? What changes are required?
Also after continuing SIP for 9 months, I find performance of magnum taxgain not that good. So I am considering to stop that. However some people advise that instead of chasing return, one should consider longterm prospect. I am confused: should I discontinue magnum taxgain or not?
I have started reading one book (though it explains MFs less and stocks more), but hope others here will help me gain some insight. Thanks.

4 Replies to “How does one build a good portfolio of mutual funds?”

  1. Had to edit my answer completely after researching your situation more. It looks like you are in India? The spread of funds you have is good. Over on this side of the world they look funny. US mutual funds are a lot different but the concepts are all the same. What are the fees to purchase, the fees for withdrawal, and what is the management fee associated? Many times there are two management fees.

    The company who manages your investments charges you one set of fees. You will have to dig to find out what these are. Look deep in the performance of each fund. When you find the interest they make per year, many times there are fees taken out by the management company.

    After the company who manages your funds, each fund will have it’s own management fee. This may not seem like it adds up, but say you have 180k/year, the difference in 1% management fee is almost 2k. Do some compounding interest calculations on that 2k per year for 35 years. Those management fees will really take a large chunk of your investment. Add this with the fee you pay to buy and the fee to sell.

    On the question selling your magnum taxgain.. You need to pick a strategy and stick with it. I am 34 in the USA, so about the same situation. I put the maximum amount that US tax law will let me add to my 401k retirement account per month. All of this goes into mutual funds. I have a mix of index funds. They are required by law here to maintain the exact ratio of the index the individual fund tracks. So I have funds that equal the S&P500, one for all US stock indexes, one for all world indexes, one for European, one for US real estate etc.. Right now Europe is down. But we have 30 years before we have to start worrying about it. So you absolutely must not engage in “market timing,” and sell when you think a fund is down. With my retirement, I have a specific % per fund type, growth, bonds etc and I stick with it. As I get older I will shift more from growth types to bonds and gold, silver etc.

    It sounds like you are in the same place as me in life. I am about to get married, look for a house etc. In the US when you do all the math for costs of repairs, maintenance, taxes etc, it is cheaper to rent than buy. So we will rent and save as much as possible. Right now we have 3 savings strategies. One for retirement, that is the most conservative. We have a second set of accounts whose purpose is to pay for our annual vacations from dividends. That took a few years to get going but it is doing well and we can now afford to go on holiday paid by these dividends. Our third account is the most challenging. We want it to generate income so that if one of us loses a job or we have an emergency we can start withdrawing from it. If all goes well, this will replace her salary and she can retire early.

    I’ll study more about how your retirement system works. I am not familiar with your annual contribution limits, mandatory withdrawal age etc. See if you can find the typical answer to this question where you live – What percent of your salary must you save per month to have %100 of that salary when you are retired? Over here a good rule of thumb if your company offers no pension, save %15.


  2. You do realize that each mutual fund is a portfolio of securities managed by a fund manager. The idea is that you research the fund manager, the management philosophy that he is using for the fund and then let him manage your money for you. To establish a portfolio of mutual funds is somewhat nonsensical as you might as well manage equities yourself at that point. Basically, your approach is analogous to purchasing variety packs of lifesavers and sorting them out to get the respective flavours.

    You should be focusing on quantifying probable outcomes and risks with investments but you’re probably not even doing the math right. For an example if for the past three years, an investment yielded -57%, 110% and 36%, the actual average annual yield for those three years is 7.09% but like most people you probably looked at those numbers and figured incorrectly that the average was 29.7%. The reason for this is that each year is essentially the previous year’s investment reinvested (compounded) hence the appropriate average is a geometric mean not an arithmetic mean. Try it out, take an arbitrary sum, calculate how much it would be after the first year, then after reinvested for the second then third year and then do the same using the “average” interest rates instead.

    Back in the 1700’s, Bernouli postulated in his book “Econometrica” that given two investment alternatives, the one with the highest geometric mean outcome is the appropriate selection. You would want the portfolio mix optimized for geometric mean outcomes thereby maximizing your log utility of wealth. A textbook reference for how this is done is “The Kelly Capital Growth Investment Criterion” by MacLean, Thorp and Ziemba.

    In general, most mutual funds are rather opaque as to who manages them and what their management philosophy is so there’s really little point in selecting mutual funds other than an index fund with low fees.


  3. Visit http://www.valueresearchonline.com to understand mutual funds.

    Invest only in the top rated funds preferably large cap & balanced funds.

    For tax saving , do not opt for dividend reinvestment. Since there is a lock in , your dividend reinvestment units gets locked for 3 years from the date of allotment of units. So please switch to pay out immediately.

    You need to have only 2 tax saving funds .Combine it with PPF .for tax saving.

    For investment you can have 3 or 4 funds only.

    For tax saving look at the top rated funds – FIDELITY Tax Advantage & DSPBR Tax saving

    For Investment , HDFC EQUITY / DSPBR TOP 100 / IDFC PREMIER EQUITY PLAN A / RELIANCE GROWTH / HDFC PRUDENCE

    For mid cap funds opt for dividend pay out. For others opt for growth.


  4. Hi PK,

    See i would like to advice you that ask this question to any Market expert like Mansukh, Sharekhan, Indiainfoline and ICICIDirect. The reason is because all people answering here are not market experts and they can give you wrong advice. So better ask those experts who have years of experience besides them. They will certainly help you in a better way.

    Regards,
    Shashwat





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