How To Turbo-charge Your Mutual Fund Portfolio

It's rather ironic that an investment product with as much Wealth Creation potential as Mutual Funds typically doesn't find a spot in the portfolio of Indian investors - who tend to veer towards bank deposits and life insurance to park even their long term savings.

If you're an existing Mutual Fund investor, or just planning to start out - here are a few tricks to 'turbocharge' your portfolio over the long term.

Determine your Ideal Asset Allocation & Stick with it
Too many people jump into Mutual Funds without taking time out to determine their ideal asset allocation (that is, their ideal split between equity and debt funds). This number would vary depending upon your individual risk profile, which can be determined using a risk profiling questionnaire. Being over or underexposed to equity mutual funds vis-a-vis your risk profile can lead to irrational decision making (and poor returns over the long term). Suresh Soni, CEO, DHFL Pramerica Asset Managers is a firm believer in asset allocation. "It has been established in various studies over time that asset allocation is a key driver of portfolio returns. Investors need to focus on this important aspect and ensure that the portfolio allocation takes into account their risk appetite and investment horizon", said Soni.

Be sure to rebalance your portfolio on a periodic basis in order to bring it back to your ideal asset allocation. An annual rebalancing should do the trick.

Stagger the equity portion through STP's
Feeling bullish? Think twice before investing hook, line and sinker into equity mutual funds. You never know when you'll be caught off guard at the peak of a bull market. Stagger your equity investment via a Systematic Transfer Plan (STP) instead. The duration of the STP can range from 3 months all the way to 24 months, depending upon how overheated the markets are. The more the markets have already fallen, the shorter your STP duration should be.

Combine lump sums with SIP's
Lump sum investments have a higher return potential, whereas SIP's have a lower inbuilt risk attached to them due to their rupee cost averaging benefit. There's no reason this should be an 'either/or' equation. Combine a lump sum investment with a comfortable monthly SIP to adequately balance risk and rewards over the long run.

Don't churn your portfolio frequently
If it's one thing you can do to turbocharge your Mutual Fund portfolio, it is to buy high quality funds and forget about them! When it comes to Mutual Funds, strength lies in passivity. Churning your investments too frequently in order to 'always hold the best funds' is an approach that will in the long run, compromise your returns. Once you've bought into good funds, you need to hold on to them until something changes drastically.

Soni of DHFL Pramerica concurs. "Investors will do well to invest for the long-term in reasonably well performing funds. Chasing the best performing funds in the short-term, induces too much churn and often ends up reducing overall portfolio returns due to taxation and cost of transaction. Investing in consistent, good funds is better than choosing the best fund from the last quarter", he goes on to say.

Don't hold too many funds
For all the good press diversification gets, there's an unfortunate caveat of over diversifying your portfolio into too many funds - it cancels out most of the long term potential for outperformance. For most investors, holding up to 5 equity funds and 5 debt funds is more than sufficient. Keep things neat and clean. If required, make additional purchases in your existing star performer rather than 'buying' yet another new scheme.

Soni's expert view is that most retail clients don't need to hold too many funds in their portfolio, and he firmly believes that one should structure their mutual fund portfolio in sync with their life goals. "Ideally an investor's portfolio should hold between 3-5 good quality funds with consistent track record. Investors should keep life goals in mind and divide their investment portfolio into different need buckets which fulfil each goal", Soni advises.