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Mutual Fund

One of the most frequent advisory questions that we get from our investors is typically this - "I can save x thousand dollars every month. I would like to invest in mutual funds through SIP. Please suggest some funds for me". We are delighted to get such mails because systematic investments in mutual funds are the best way to turn savings into efficient investment vehicles. In this article, let me talk about a simple method to construct a good SIP portfolio.

1. First, decide upon the asset allocation - By asset allocation what I mean is how much money goes every month into what kind of mutual fund. It is possible to get very complicated with this, but to keep it simple you can focus on just three types of funds - large-cap oriented funds, small/mid-cap funds and debt funds. A typical allocation would be 50% in large-cap oriented funds, 20-30% in small-mid/cap oriented funds, and the rest in debt funds. To ensure stable and optimal returns, every SIP portfolio should have some debt fund component in it. It can just be a small portion - 20-25% of the monthly investment, if your portfolio is an aggressive portfolio for the long term.

2. Second, decide upon the number of schemes in your portfolio - Given the fact that we have three prime asset classes as above, your portfolio should have at least three schemes in it. On the upper side, it should not have more than seven-eight schemes. More than that, and your portfolio becomes difficult to track and manage. Ideally, a portfolio would have five schemes - four equity schemes, and one debt scheme.

3. Third, decide on the schemes - this is the last thing to do while designing the portfolio, not the first. Once you know what kind of schemes you are looking for and how many of each kind (from steps 1 and 2 above), this step becomes a simple choice. You can go to research websites like valueresearchonline.com or Mint 50 and look at their top rated funds. You can simply pick one or two in each class that you are interested in and you'll have your portfolio ready!

Let us take a simple example and walk through the process to illustrate. Suppose you want to invest Rs. 10,000 a month in a moderately risky portfolio of mutual fund schemes for the next 3-5 years. We can decide to go with a 70% equity, 30% debt portfolio. In equity, we can decide to have 50% large-cap oriented allocation and 20% small-mid-cap oriented allocation. We will need two large-cap oriented schemes (Rs. 2,500 each), one small/mid-cap scheme (Rs. 2000) and one debt scheme (Rs. 3000) to invest in.