Each investor’s portfolio is unique depending on the risk profile and financial goals of the individual investor. However there are certain common features in most portfolios. There are specific mutual fund schemes that should be by default present in an investor’s portfolio. Most people these days have started planned investment and professional management of their funds. A balanced portfolio is the right way of investing that helps you gain optimum returns with minimum risks.
Some of the mutual fund categories that every investment portfolio should comprise of, are as described below:
Liquid funds are short-term schemes that serve for our short-term needs. This fund can only be utilised for regular expenses and cannot contribute much towards health creation. Some liquid funds earn approximately 4-5% returns in a span of six-months. Liquid funds are ideal for individuals who save money more than their one month’s expenses in their bank account.
Equity Linked Savings Schemes (ELSS):
This is one category of funds found in almost every portfolio as it comes with tax deduction benefits under Section 80C of the Income Tax Act. This equity diversified scheme can help investors avail tax benefits of up to Rs.1.5 lakh in a year. However, this can benefit only those investors who have not already availed Section 80C benefit of Rs.1.5 lakh.
In certain cases, having an ELSS can be avoided. If you do not already have a life insurance policy, you can keep ELSS on hold and get a life cover first. Also, if your investment portfolio is heavy on the equity, then it becomes risky and ELSS should be avoided.
Diversified Equity Funds:
A diversified equity fund is the simplest of all fund types. It comprises of a multi-cap or a large-cap oriented fund. A multi-cap fund is better than large-cap as it includes a good mix of large- and mid-sized companies and performs better.
Balanced funds are also a must-have in an investment portfolio. They are hybrid equity oriented fund schemes that invest 65% - 75% in equity oriented securities or equities and the rest in money market securities or debt. This brings the portfolio under moderate risk tolerance. This mix of equity and debt enables wealth creation for the long term.
Index Funds or Exchange Traded Funds:
Funds that are a reflection of a stock market index such as Sensex or Nifty are referred to as Index funds. No active management is required in this category of funds and it generates as much as the respective index generates. The charges for managing these funds are also economical. Exchange traded funds are also included in this category. Selling and buying of these funds can only take place one exchanges through demat.
Arbitrage funds are a good choice in volatile stock markets. This strategy utilises the price inefficiencies in cash and derivative segments. These funds help you make money in uncertain times. It not only limits your loses but also your gains. Arbitrage funds also fall under equity taxation.
Mutual funds can be invested internationally as well. As diversification in your portfolio is important across sectors, it is also important to diversify across countries. Investing internationally gives you an exposure to different economies. Some fund of funds (FoFd) collect money from investors here and then combine it to invest in an internationally listed mutual fund scheme.
Our market has gone through many phases from fall of government security gains, flat markets and volatile markets. This variety in stock markets only prove that it is not advisable to depend on one category of asset or country as it may be harmful to the portfolio’s growth.
Investment planning should involve understanding of financial goals and risk profile. Asset allocation is one of the most important steps while investing and needs periodic review. A rebalancing is needed when you are investing in more than one type of fund category.
GST rate of 18% applicable for all financial services effective July 1, 2017.