Without further ago, let’s start with the secret sauce recipe right away:
What you need:
- 1 tablespoon utility
- 2 teaspoon characteristics
- 1 cup goal
- Mix the utility and risk-return characteristics in a large cup of goal 1.
- Heat it for a long time or short time depending on the goal.
- Stir regularly to not let the bottom part stick to the cup.
And your meal is ready!
Didn’t make much sense? Allow us to explain.
Cup of goal
Instead of looking at your entire portfolio, break it into small mini portfolios. Each portfolio should help you meet one goal. This is what the ‘cup of goal’ refers to. Divide and rule.
This way, you only look at few Funds every time you monitor it. Imagine looking at 100 numbers at the same time on a screen. Compared to that, looking at 10 seems better, right? But we digress...
Now fill each portfolio with a Mutual Fund that can help meet the goal. Look at every Fund’s ‘utility value’. Thus, segregate the Funds into different cups or portfolios.
A Fund’s utility has got a lot to do with its risk-return characteristics. A low-risk Fund usually invests in Debt. A high-risk Fund, more often than not, deals with Equity. Neither delivers returns in the same way. This can come handy while classifying Funds into portfolios. If you want more help, here is one of the most brilliant way to understand Debt and Equity based portfolios.
Would you cook a pot for 10 minutes when the ingredients need 20 minutes? No.
Similarly, some Funds require more time to deliver returns. Add it to the portfolio of a goal that has a similar time frame.
You can add Equities to long-term goals and Debt to short-term goals. Of course, you can add a pinch of both in every goal. Just a pinch, though!
If you don’t stir regularly, the food forms a clot and sticks to the pot. It’s rarely salvageable. Similarly, monitor your portfolios regularly. Otherwise, you may not weed out a poor Fund on time.
Taste it before serving
Just like you taste food to check for salt, assign a benchmark to each portfolio. A benchmark helps you figure out if your Fund/portfolio is performing well. If you need help with this, here’s what is Benchmark performance and how will it help you pick the right mutual funds.
That was the formula to manage your portfolio. However, you may want to rebalance it regularly by exiting or replacing some Funds.
Here’s how you trim your MF portfolio- explained with an example.
Suppose you have a closet full of 50 trousers and 100 shirts. How do you decide which pair to throw out?
You consider their usability. You figure out if they fit you well. You think about possible pairings, and get rid of the shirt or pant that does not have a matching pair anymore. You don’t throw on whims and fancies, do you? A similar philosophy extends to your Mutual Fund portfolio too.
Ask yourself a simple question: Do you still need the Fund? If the answer is yes, then you should keep it.
The bottom line is; managing a portfolio can be easy if you divide your Funds into categories. Your goals can be the decision factor. This way, you can also monitor how close you are meeting your goals.
Mutual fund investments are subject to market risks, read all scheme related documents carefully.