B. BUILDING A MUTUAL FUND PORTFOLIO
1. TENURE
- How long do I want to stay invested?
- Each financial goal has a different tenure.
- Invest in funds that give best results in the time horizon of each goal.
- Short term – Debt funds - < 1 year
- Medium term – Balanced funds, Fixed Maturity Plans - > 1 to <5 years
- Long term – Equity funds - > 5 years
2. ASSET ALLOCATION
- How do I want to split my investment?
- Choose the fund that invests in avenues that suit your desired asset allocation.
- Heavy on equity – Diversified, Large-cap, Mid-cap, Small-cap, Sectoral funds
- Heavy on debt – Debt funds, Fixed Maturity Plans
- Mix of both – Balanced funds, Monthly Income Plans
3. RISK PROFILE
- How much risk can I take?
- The funds in your portfolio must match your risk appetite.
- Also factor in goal-related risks while picking funds.
- Low risk – Debt funds, Monthly Income Plans, Arbitrage funds
- Moderate risk – Balanced funds, Index funds, Diversified funds
- High risk – Large-cap, Mid-cap funds, Small-cap funds, Sectoral funds
- Mix of both – Balanced funds, Monthly Income Plans
4. TAXABILITY
- Which tax breaks do I want?
- The tax on income from funds depends on the kind of fund and investment tenure.
- Choose ones that are the most tax-efficient for you.
- Low tax – Debt funds for > 1 year
- No tax – Equity funds, Equity-oriented balanced funds for > 1 year upto 1 lakh annually
- Tax exemption on both investment and income – Equity Linked Saving funds
5. LIQUIDITY
- Would I need money at short notice?
- Your monthly surplus has two parts: ready-to-use cash, and investible money.
- Choose funds that meet your cash-flow needs.
- If required at short notice – Liquid funds
- If not required immediately – Equity funds