Portfolio Construction of a Mutual Fund

Topics: Investment, Modern portfolio theory, Mutual fund Pages: 4 (1244 words) Published: January 30, 2013
The world of investments has a wide range of options with complex financial instruments, because of which, mutual funds have emerged as a popular choice for an average investor. To the time-constrained investor, mutual funds provide a professionally managed collective investment vehicle that pools money from many such investors together to achieve a targeted objective through investments into asset classes like equity, debt and gold. However, while still being one of the simplest forms of investment, in recent times mutual funds have become a bit more complicated. With the emergence of newer asset classes and sub-segments within them, mutual fund houses have spun off a number of funds, with different investment objectives and different target investors. This has complicate investment process, making it very important for investors to understand the nuances of building a good mutual fund portfolio. Portfolio construction of a mutual fund:

The broader points to keep in mind, when constructing a portfolio, are the financial goals to be achieved and the targeted duration till their achievement. Both these aspects affect the selection of an investment instrument, the amount of money allocated to it and the tenure of the investment, as your risk-to-return ratio would vary accordingly.

Theoretically, investments targeting a high priority financial goal with a shorter duration, should be of lower risk. Conversely, when the goal has a longer tenure, its investments can carry a higher risk and a higher return. As mutual funds cater to both these kinds of needs, constructing a mutual fund portfolio around them can be easier, with the following points being kept in mind:

Right mix of asset classes: Mutual funds invest into equity, debt and gold, or a mixture of these asset classes. It is often observed that investors’ mutual fund portfolios tend to be lopsided in favour of one asset class. Either the portfolio comprises a large amount of equity-oriented...
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