Building a mutual fund portfolio

hi welcome to the last video in the mutual fund Series this is over the last 12 videos we've discussed quite a few things related to mutual funds in this video we'll talk about how to build a mutual fund portfolio [Music] when we talk about building a mutual fund portfolio or for that matter even a stock portfolio there are two assumptions that we make one you're covered for risk two you're covered for emergencies it's absolutely important for you to consider these two things even before you can think of building a portfolio what do I mean by cover for risk an individual can face many different types of risk in his or her lifetime risk across multiple areas of life physical health mental health permanent disabilities prolonged state of joblessness broken relationships and whatnot while it is impossible to anticipate all these different situations and get a cover it is important to at least get a cover for two things loss of life and hospitalization of course the cover comes in the form of insurance a good term insurance will ensure that your dependent ones are financially secure even if you pass away unexpectedly and a good health insurance will ensure that your hospital bills are covered while you're getting treated for a chronic illness and the next thing we spoke about was a cover for emergency what I mean here is a emergency Corpus an emergency Corpus will help you navigate through tough times emergencies can come in any form it could come in the form of a job loss it could come in the form of a medical emergency or it could come in the form of you replacing a expensive piece of electronics in your house nobody can really time these emergencies one needs to have sufficient funds which is easily accessible to navigate through these tough times now one question that often comes up is how much is sufficient in terms of emergency Corpus different people have different opinions but I see that most people tend to agree on having at least six months of expenses stashed away as a emergency Corpus personally I don't subscribe to this thought each person is different each family is different it would help if you can sit down with your family go through different possible scenarios and estimate how much you should save in terms of an emergency corpus now if you're starting your personal finance Journey today make sure you have a good term insurance make sure you have a good health insurance and sure you don't combine insurance and investments in the same vehicle and finally ensure that you have a good emergency Corpus that makes sense for your family so assuming that you have these things in place let's proceed to understand how to build a mutual fund portfolio a portfolio is essentially a vehicle think of a portfolio as a vehicle to solve for a financial goal that you have a financial goal can be anything consider this imagine there's a newly married couple both the husband and wife are young maybe in their late 20s and both of them are working professionals the couple dream of buying an apartment 10 years down the lane which costs roughly about one and a half Cross or think of this situation a 40 year old working-class woman aspires to accumulate over 50 lakhs on the next five years to upgrade her car or maybe think of the situation I promise this the last one but 21 year old has just started working for an MNC in eight years time he aspires to accumulate 20 likes to fund his education in the UK all these three different situations I spoke about are examples of a financial goal if you realize a financial goal is defined by the following the Quantum of fund required the estimated time of which this fund needs to be accumulated and the current age of the person without these three attributes a financial goal is incomplete for instance if I say that a young professional wants to accumulate enough money to fund his education few years down the lane then this is not a good example of a financial goal as there are no specific details here now I've quoted three random situations here and with this you can get a sense how diverse each person's financial goals can be now given this it's nearly impossible to consider all types of financial goals and Stitch together a portfolio that will help achieve that goal instead let me share a template with you using which you can build a mutual fund portfolio to address a financial goal the table looks simple and it has some basic information it contains the fund type category the main constants of the fund expected cagr as much as I hate it I've included this the minimum holding period for the fund if you were to invest in it not that you cannot invest in the fund and hold it for lesser than the minimum holding period it's just that if you do so recovering from a drawdown can be very difficult Financial goal the kind of financial goal the fund can be used for more on this later as we speak and I've also included special remark basically things that you need to be aware of I would suggest you keep the stable handy it will help you build a mutual fund portfolio for most of the situations that you may have [Music] at this point we need to talk about one aspect of portfolio building I've seen investors have multiple funds in their portfolio by multiple I mean in excess of 10 or 12 funds usually their portfolio contains three or four large cap funds three or four mid cap funds couple of debt funds and maybe a hybrid fund thrown in this is a classic example of a messy directionless and a clueless portfolio ideally you should avoid redundancy and have a handful of funds in your portfolio anyway let's revisit the newly married couple case and see how we can stitch together a portfolio for them remember this was a young newly married couple both of them were working class they aspired to buy an apartment 10 years down the lane costing one and a half crores with this we have the following data savings per month 30 000 each Target Corpus is one and a half crores time available is 10 years age both of them are young so they can afford to take some risk given all this let's try to come up with a portfolio for them by method of elimination I find the method of elimination quite powerful if not for anything it'll at least help me avoid investing in the wrong months all right we know that there's 10 years to accumulate the corpus this is a good enough time to digest all the market volatility given this we need not have to look at debt as a primary vehicle to invest the money in of course debt has a role to play and we'll talk about it later the focus is clearly on Equity mutual funds the question is which fund do we select large and mid cap funds may not work since most of the large and midcap funds are mid cap stocks anyway I would also eliminate small Cap Fund because they are too volatile and risky of course 10 years is a good enough period for this fund but I would personally avoid given the Quantum of volatility in these funds multi-cap fund is again a quasi mid and small Cap Fund I may as well avoid this and stick to Mid cap funds instead Focus funds take concentrated bits highly dependent on the fund manager skills if the funds investment turns out to be a mistake then the realization may come in a bit too late thematic funds are sector dependent if the call on the sector goes wrong the fund will forever take to recover elss fund is not an option for obvious reasons index fun while this may seem like a great option somehow a strict 10-year period may not do justice for these funds these funds are best used for hyper long-term financial goals like retirement by the way I had done a video on index fund and how you can use these funds for hyper long-term financial goals like retirement do watch the video by clicking on the link in the description below anyway this leaves us with a few funds a large Cap Fund a mid Cap Fund and a value fund I would also like to eliminate value funds given the uncertainties involved in unlocking values in stocks hence the best option we have for this situation is either a large Cap Fund or a mid Cap Fund they both can choose a fund each across both these categories and start their investment Journey do recall in the previous video we've discussed how to select an equity mutual fund the best way to invest in these funds would be through a systematic approach and invest small amounts every month so how does the numbers stack up after 10 years assuming the cagr of 10 percent you can use any sub calculators available online and you'll see that the couple can build a corpus close to about 1.2 crores which is quite close to the Target that they have in a 10-year window the small deficit can be plugged by a bank loan now here is another aspect to consider what if the market starts to fall and you start losing your accumulated wealth as you approach the target here this is a possibility after all nobody can time the markets now there's one way in which you can deal with this as you start approaching your target year let's say maybe around the eighth year you can start withdrawing funds from the Equity Fund and start deploying that in a debt fund to preserve the capital you can withdraw maybe on a monthly quarterly or even on a half yearly basis and you can choose to invest this in something like an ultra short-term fund or maybe even a liquid fund the broad idea here is to protect your capital from a market Fall as you start approaching your target year let's discuss another case a 40 year old wants to save 25 lakhs in eight years to fund his daughter's education overseas the monthly available funds for this goal is 20 000 rupees since the time period is less than 10 years there's no point looking at building an equity only portfolio the plan should involve both debt and Equity within the debt funds we can completely ignore liquid and overnight funds since we have eight years at our disposal all funds with macular duration less than two years can be ignored since these are relatively short maturity funds money market funds can also be ignored since the investor can take a slightly higher degree of risk credit risk fund clearly is very risky and should be avoided corporate bond funds is an option guilt funds won't fit the bill either by the way please do read these chapters on Varsity to understand what corporate bond fund and Guild funds are so basically we are left with short duration funds and corporate bond funds as an option investing in a corporate bond fund is tricky if you choose to invest in a corporate bond fund then a periodical review of the funds portfolio is mandatory if you don't wish to do that then the only alternative for you is to invest in a short duration fund of course you can also invest in an Arbitrage fund probably the best portfolio for this situation would be a combination of an Arbitrage fund hybrid fund and maybe a short duration fund I'll spare the math but if you were to compute the accumulated Corpus at the end of eight years assuming a seven percent cagr then you can easily achieve the Target Corpus of course we have another option since we have eight years of disposal we can even consider investing in a large Cap Fund maybe about 20 or 25 percent of the portfolio I hope this gives you a sense of how to build a mutual fund portfolio I'll leave you with two thoughts use conservative estimates when dealing with returns in personal finance if in the end if the returns turn out to be good consider yourself lucky second you need to understand that the equity returns can be lumpy it won't be smooth and steady Like A bank's fixed deposit there periods where the returns are very mediocre but the bulk of the returns can come in short bursts of time unfortunately nobody can time the short bus therefore investing in a systematic manner every month is perhaps the best way and remember give your investment sufficient time and with that I hope you enjoyed watching this video series as much as we enjoyed making this for you do comment and let me know if you have any queries good luck foreign [Music]

Channel: Zerodha Varsity

Views: 147,025

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Id: 6Zrl3ZeqqsE

Length: 11min 38sec (698 seconds)

Published: Mon Jun 19 2023