4 steps to creating a portfolio

Putting together a portfolio of investments is like building a home. Even if a house is filled with beautiful rooms that may not be enough: All those rooms need to work together to form a pleasing and useful whole. Investment portfolios work the same way.

Here we show you how to design a successful portfolio of mutual fund investments that work together to help you reach your goals.

  • Have a blueprint.

    Just as building a home begins with a blueprint, you need a pattern for your portfolio. The blueprint tells the builder to build a structure of a particular size and shape, with specific features, to suit the needs of its future owners. Similarly, your portfolio should suit your needs and specifications.

    The best starting point is to think about why you're investing in the first place. Maybe you're investing for retirement, for your child's education or marriage, or for the down payment of a home. Get specific. How much money will you need for each goal? How much time do you have?

    Whatever your goal, it gives you vital information. When you figure out how long you'll be investing (your time horizon), you can come to terms with how much of your investment can be put at risk. The closer your goal, the less you can afford to lose, so the focus should be more on preserving what you've made rather than on generating additional gains. The more time on your side, the more should be the tilt towards equity.

  • Decide on an asset allocation.

    The heavy lifting of any mutual fund investment plan starts well before individual investment selection. In other words, sensible portfolio construction must commence with asset allocation. Some financial experts believe that determining your asset allocation is the most important decision that you'll make with respect to your investments - that it is even more important than the individual investments you buy.

    So how do you decide how much should find its way into hybrid, debt, and equity.

    One rule of thumb is to use your age as a guide. For instance, if you're 33 years old, put 33% of your portfolio into debt funds and the rest into equity funds. But like all thumb rules, it has its limitations. Some investors might find that figure conservative. Others might find that it's too aggressive for their particular goal.

    For instance, a 23-year old girl who has just got her first job may be saving Rs 2,000 every month for her retirement. In that case, the entire amount can be invested in a diversified equity fund. However, another 23-year old may be focused only on the down payment for a home within the span of two years. In that case, the money should go into a fixed deposit or a short-term debt fund.

    So go back to the blueprint to make a decision. The more time on your side, the greater the potential exposure to equity.

  • Discover what your already own.

    Maybe you can name all of your mutual fund investments off the top of your head and detail how each one performed last week. Good for you. But can you explain how they work together? Which are your core mutual fund investments? Are you diversified? Do you have a lot of overlap? You must be able to answer those questions before you can see how (or even if) your portfolio fits your pattern.

    To figure out exactly what you own, you could note down all your mutual fund investments on a spreadsheet and calculate how much you have in various assets.

  • Bring it all together.

    Now that you know what you have, it's time to find out whether your current mutual fund portfolio fits your blueprint.

    Begin by checking your mutual fund portfolio's asset allocation. If that doesn't match the mutual fund asset allocation you laid out in your blueprint, shift assets among funds to tailor the mix.

    You could also weed out redundant investments. If you have three large-cap growth funds, for example, they probably aren't all equally good. But before you sell, ensure that you have held the units for at least a year to avoid short-term capital gains tax.

    Most importantly, ensure that your portfolio includes core holdings, those investments on which you're relying on most to help you meet your goals. Core investments should be the biggest part of your portfolio and should provide a foundation to build up upon.

  • The example given in the document are for illustration purpose only, it does not represents the views of Axis Asset Management Co. Ltd. and must not be taken as the basis for an investment decision. Neither Axis Mutual Fund, Axis Mutual Fund Trustee Limited nor Axis Asset Management Company Limited, its Directors or associates shall be liable for any damages including lost revenue or lost profits that may arise from the use of the information contained herein. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. Investors are requested to consult their financial, tax and other advisors before taking any investment decision(s).

An investor education initiative from Axis Mutual Fund

Goals shown are for illustration purpose only and there is no assurance that the goals represented may be achieved.

Statutory Details:Axis Mutual Fund has been established as a Trust under the Indian Trusts Act, 1882, sponsored by Axis Bank Ltd. (liability restricted to Rs. 1 Lakh). Trustee: Axis Mutual Fund Trustee Ltd.Investment Manager: Axis Asset Management Co. Ltd. (the AMC). Risk Factors: Axis Bank Ltd. is not liable or responsible for any loss or shortfall resulting from the operation of the scheme. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

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