How to choose a suitable mix of mutual funds in your portfolio?

How to choose a suitable
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Investing in mutual funds is not just a financial transaction; it's a strategic move towards potential wealth creation. The world of mutual funds offers a long list of investment options, each with its unique characteristics and potential returns. While these choices provide flexibility, they can also pose a challenge when it comes to selecting the right combination of mutual funds for your portfolio.

Let’s try to understand the intricacies in choosing a suitable combination of mutual fund schemes to build a strong portfolio.

  • Table of contents
  1. Understanding your investment objectives
  2. The right mutual fund combination
  3. Monitoring and adjusting
  4. FAQ

Understanding your investment objectives

Mutual fund investments necessitate a clear understanding of your financial objectives. Are you striving for long-term growth, seeking relative stability, or aiming for a blend of both? It's essential to establish your investment goals and risk tolerance before deciding where to invest. These factors will serve as guiding principles for determining your allocation across different asset classes like equity, debt, and gold.

Investment goals: Define your financial aspirations, whether it's saving for retirement, a child's education, or a future down payment on a home. Long-term goals typically warrant a higher equity allocation, while short-term goals may favour debt funds for relative stability and lower risk.

Risk tolerance: Evaluate your ability to weather market fluctuations. If you are comfortable with short-term volatility in pursuit of relatively higher returns, a larger equity allocation is suitable. On the other hand, if you prefer relative stability and lower risk, a significant portion of your portfolio should be allocated to debt funds.

Diversification: Diversification stands as the foundation of a good portfolio. It's not just about having different funds; it's about strategically spreading your investments across various sectors, market caps, and even asset classes to create a potential cushion against market fluctuations.

Asset allocation: Allocate your portfolio across different asset classes, such as equity, debt, and gold. Equity funds invest in stocks, offering the potential for higher returns but also carrying higher risk. Debt funds invest in bonds, providing relative stability and comparatively lower returns. Gold is considered as a hedge against inflation and market volatility.

Investment style diversification: Within each asset class, diversify across different investment styles. For instance, within equity funds, consider large-cap, mid-cap, and small-cap funds, which invest in companies of varying sizes. Diversification helps mitigate the impact of underperformance in any one sector.

The right mutual fund combination

Once you have a clear understanding of your investment goals, risk tolerance, and diversification strategy, it's time to select the right combination of mutual funds.

Consider the following factors:

Fund performance: Analyse the fund's historical performance, considering factors like returns, volatility, and risk-adjusted returns. Compare the fund's performance against its benchmark.

Fund management: Evaluate the experience and track record of the fund manager. Consider their investment philosophy, risk management approach, and ability to execute the fund's strategy.

Fund expenses: Assess the fund's expense ratio, which represents the annual cost of owning the fund. Choose funds with lower expense ratios to maximise potential returns.

Monitoring and adjusting

Regularly monitor your portfolio to ensure it aligns with your objectives. Market dynamics and personal circumstances can change, necessitating adjustments. Frequent reviews, preferably on an annual basis, allow you to realign your portfolio with your evolving financial goals.

Monitoring frequency: The frequency of monitoring depends on your investment horizon and risk tolerance. Long-term investors may review their portfolios annually or semi-annually, while more active investors may check them quarterly or even monthly.

Rebalancing criteria: Rebalance your portfolio when asset allocations deviate significantly from your target. For instance, if your equity allocation falls below your target due to market declines, you may consider purchasing additional equity funds.

Market trends: Stay on top of market trends and innovations in the mutual fund landscape. Explore new fund categories, keeping an eye out for emerging opportunities and potential risks. Being proactive in adjusting your portfolio based on evolving market dynamics improves its adaptability.


How often should I check my mutual funds? The frequency of checking your mutual funds depends on your investment horizon and risk tolerance. Long-term investors may review their portfolios annually or semi-annually, while more active investors may check them quarterly or even monthly.

How do I know if I am choosing the right mutual funds?
Selecting the right mutual funds requires careful consideration of your investment goals, risk tolerance, and diversification strategy. Analyse fund management team, and expense ratios to make informed choices.

What is a suitable way to choose a mutual fund?
A suitable approach to choosing mutual funds involves a combination of self-research, professional guidance, and continuous monitoring. Consult financial advisors for personalised advice, and regularly review your portfolio to ensure it aligns with your evolving financial objectives.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.