BackDiversify portfolio with 6-9 mutual fund schemes
Having more than this could compromise on an investor's ability to manage the portfolio effectively
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I’m new to investing in mutual funds. I have put money in fixed deposits and have life and health insurance policies. What is the best investment option among mutual funds to get a regular monthly income? I will retire in another 10 years and this will be for my retirement years.
—Anirudh Ghosh
First of all, you need to consider your investments before and after retirement separately. Since you still have 10 years to your retirement, you need to consider them as wealth building years where you accumulate a corpus that you can use to generate regular income after retirement.
So, the portfolios for these two periods would differ significantly. During your pre-retirement years, especially in the first five to seven years, you should invest substantially in a portfolio of equity funds across market segments. After that, you can reduce your exposure to equity funds and bring it down to zero in time for your retirement.
After retirement, you can utilize the corpus that you have that is by then fully invested in debt funds to fund your need for a regular monthly income. You can set up a systematic withdrawal plan from your portfolio for this purpose.
How many funds should I invest in for the right amount of diversification?
—Ram Kishore
The answer to this question depends on how many asset classes one wishes to invest in using a mutual fund portfolio. Funds can be used to invest in multiple asset classes such as equities, debt, and gold.
However, some investors use mutual funds only for investing in the equity market. For other asset classes such as debt and/or gold, they go with alternate channels such as fixed deposits, bonds, provident fund and (for gold) jewellery.
Others choose the convenience of mutual funds for their entire portfolio across asset classes.
Thus, the optimal number of funds in a portfolio would depend on the number and nature of the asset classes that it contains.
For equity funds, a total of three to five funds from the large-cap, diversified, and mid-cap segments of the market would be good. The key is to get diversification both across market segments as well as fund management styles in the portfolio. For debt funds, two-three funds covering the short- and medium-term debt instruments would suffice. If you were interested in investing in gold, one gold fund would be adequate since there is no fund management or product diversity in this asset class. So, even for a multi-asset class portfolio, six to nine funds would provide sufficient diversification. Having more than this could compromise on an investor’s ability to monitor and manage the portfolio effectively.
Queries and views at mintmoney@livemint.com
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