Key Questions For Creating Own Mutual Fund Portfolio Like a Professional

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Coinmonks

7 min readDec 12, 2021

Hey guys, I am sure all regular readers of the blog have been waiting for this post eagerly since last five weeks……and rightly so, after so much of hard work, what is the point, if we do not get to use our knowledge practically for wealth creation and to gain financial independence. Just a brief recap before we proceed towards creating our own MF Portfolio. Till now, in this series call Mutual Fund we have discovered what all financial products which qualify as MF are there in the market and these include Equity, Debt, Hybrid, Solution and Other Funds. The underlying difference between all these funds is investment instrument and time period for investment. More than 90% of the products available in the market invest either in equities, debt or in some combination of these two. Remaining few invest in other asset classes such as commodities, derivatives, ETFs and bouquet of other professionally managed funds. Then we also saw various options and discussed merits of Growth vs Dividend, Regular vs Direct, SIP vs Lump-sum and ELSS.

Now, lets take a pause and organise all these informations in some sort of order to decide which all instruments, products and schemes will suit are cause and why. To do this, we need clarity or at least some indications towards following questions-

Why am I Investing? Is it linked to some Purpose or saving for Rainy-day/Wealth Creation? This question needs to be well thought out in advance. In short, it tells you, what may be your expectations from your investments. For example, If I want to build Iron Man Suit and it is likely to cost me Rs one crore. If I invest Rs 1000/- per month and taking compounding of 12% annual, when can I expect this money to be sufficient to start building my Iron Man suit. Your reasons for investment and expectations will be absolutely unique such as saving to buy a dream house, to finance self or children’s education or just building enough corpus to retire and follow your dreams of pursuing your life’s calling.
What is my window of investment? This question along with the previous question will answer whether you will be able to reach your goal for investment in the time period you have in mind. If not, this will also tell you how much more you need to invest and for how longer to reach your goal. For many people, it may simply mean, if they keep on investing till their end of employment, how much money they will have at the end of it.
What is my Age and Period of Projected Employment? This is somewhat linked to previous question and may help you decide the window of investment. Though maximum people investing in MFs are married people with regular jobs, there is still a large segment for people who may not have begun their professional journeys or might have retired and still wants to invest their savings to optimally grow it. For many beginners, this will also help in deciding the risk appetite and hence the choice of investment instruments.
Do I have a pool of money to invest right away or will I be investing from my monthly savings? This of course points to choosing a Lump-sum option or going with SIP route. But what if, I do not have a regular income or savings source? Needless to say multiple lump-sums would have to be done and it makes it a little tricky to track and project likely future returns. My point here is that no two people will have same financial conditions and therefore, no one solution can fit all.

Pro Tip — If you do not have a regular source of income or cannot commit to a certain sum every month, don’t worry. What ever you save by end of the monthly income cycle, invest it. Remember that any amount larger than Rs 500/- or multiples of it can be invested in good MFs. it is also possible to subscribe for a SIP, based on a projected savings per month and if you do not have sufficient money in any particular month, the SIP will be declined for that month alone. There is absolutely no penalty for defaulting on SIP any number of times.

5. Other considerations such as Tax Savings — for many salaried individuals, there may be a requirement of tax planning under section 80C or 80D while wanting to grow their investments or paying for health insurance for self, spouse, dependent children or parents. For both these need ELSS may be an attractive option, where under 80C, Rs 1.5 lakhs tax rebate can be obtained and similarly under 80D ELSS linked health insurance may be taken to seek rebate of Rs 25,000/- for self and incase of elderly parents additional Rs 50,000/-. This needs to be considered while planning investment along with tax planning.

These are the basic five questions, to understand yourself, your financial goal and probably what may be your risk appetite. Let me try making a flow chart to give more clarity

I have often seen people asking, what % of their salary should they invest, and I always insist that there can never be a single solution as it depends on how much you earn and what are your expenses. People also quote concepts of power of compounding therefore, should one start early and should they invest more? Again, I would advice that you must invest irrespective of your age, what ever you can, without burdening today or loosing sleep for tomorrow. As my analysis hints at…… what ever you earn today and therefore your saving potential today, will certainly rise with time, in almost all cases whether you are self employed or have a proverbial ‘nuakri’. Therefore, there is a greater chance that what ever you save now in an year………you may be able to do that just in a month in future.

What I would recommend to everyone is financial discipline and prudence. Spend if you must ………but why to over-spend??????? Just because you have money in your account does not mean it need to expended. But at the same time, if there are genuine requirements, do not cringe today to have a wealthier tomorrow. What in my views is the single most important thing about investing is, if you have any money which you do not need immediately, irrespective of how much amount or for how long, it should be immediately invested in appropriate instruments to make it work to earn more money. Similarly, if you run in some financial troubles or some unforeseen expenses crop up, do not ever think twice to encash your investments because what else you have saved it for. The most crucial point here is common sense or in this case financial sense. If your investments have been offering only 12 to 14% and if you take a personal loan at 16 to 18% you are bleeding money. Similarly, often I have come across people who have defaulted on credit cards and ended up paying up to 35% as penal interest…….while their investments were only growing at 14%. Therefore, no matter how busy you are, you have to consider all options and in the end…….take decisions based on real hard numbers.

I know…..I know……you have been waiting to create your own portfolios and that is still not in sight. But guys, as I have covered under each question, there will be varying needs, capacity, time horizon and risk appetite for different people. Therefore, spend some time over the week to realistically analyse these questions to figure out your portfolio. I intend to create 3 model portfolios, based on investor age and therefore, time horizon and risk appetite for investment through various asset classes. I will be covering these model portfolios in next weeks post……so lookout for them and till then happy investing.

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Key Questions For Creating Own Mutual Fund Portfolio Like a Professional

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Written by Dhruv Srivastava