Building a mutual funds portfolio is same as that of building a house. There could different kinds of designs, tools, materials, and strategies involved along with some basic features.
Here’s a step-by-step that allows you to build your mutual fund portfolio hassle-free. Using this approach, you can construct a portfolio that aligns with your investment strategies.
4 Steps To Build A Profitable Portfolio
Step 1: Identify Appropriate Asset Allocation
First of all, you need to ascertain your financial situation & goals before constructing the portfolio. Some of the important things to consider are your age, how much time you require to grow your investments, capital to invest & future expectations.
In addition to this, you also need to take in your risk tolerance and personality. Are you keen to invest money for greater returns in the long run? After you get clarified and assessed your current situation, you need to move on to the next step.
Step 2: Build the Portfolio
Now you need to part your capital between two different asset classes. For example, you can divide the portfolio equity portion between domestic and foreign stocks, and market capitalizations of different industry sectors.
You can allocate bond portions between government debt, or corporate debt. Here’s a simple way to choose the securities, and assets to nix your asset allocation requirements,
Stock Picking- Pick stocks that satisfy your risk appetite depending on the stock type, market cap, sector, etc
Bond Picking- Pick bonds after considering the bond type, maturity, coupon, general interest-rate environment, and the credit rating.
Mutual Funds- As mutual funds are made available in various asset classes; you need to hire a fund manager.
Exchange-Traded Funds- ETFs are viable alternatives that get a trade like stocks. As they can’t be actively managed, it's best to pick index funds.
Step 3: Reassess Portfolio Weight
Once you achieve an established portfolio, you are required to analyze and rebalance it frequently as price movements can cause the initial weighting of your portfolio to change. Quantitatively categorize your investments to assess the actual asset allocation of your portfolio.
To rebalance, identify which of your positions are underweighted, and overweighed. Determine how much of your current position you are required to allocate and reduce to other classes.
Step 4: Rebalancing Strategically
After you have decided which all securities you need to reduce, you can decide the underweighted security to buy that precedes the overweighed securities. If you suspect your overweighed stocks can fall, you can consider selling them despite tax implications.
The entire process of constructing mutual funds portfolio requires maintaining your diversification. Simply owning securities without diversification will take you nowhere.
So, ensure your holding falls within a given asset class that can be spread across an array of industry sectors and subclasses.