Market Volatility: How to Build an All-Weather Winning Mutual Fund Portfolio

What you essentially need is an all-weather mutual fund portfolio that can perform well under various economic and market conditions. An all-weather portfolio helps you minimise the impact of market fluctuations to generate optimal risk-adjusted returns.

So how can you achieve it? Let's break it down step by step...

Step 1: Identify your Goals

The first step is to identify your goals

The core objective of investing in mutual funds is to help you achieve your set financial goals. If you invest without a goal in mind your investments may not yield the desired results.

Thus, the first step is to make a list of your various financial goals and classify them based on the investment horizon.

Short term goals are the ones that you aim to achieve in the next 1-3 years such as planning a foreign vacation, while medium term goals are the ones that you aim to achieve in the next 3-5 years such as buying a car, and finally long-term goals are the ones that are at least 5 years away such as retirement.

Classifying your goals based on time horizon will help you figure out the risk you are willing to take for each of these goals because generally longer-term goals allow you to adopt an aggressive investment approach, while shorter-term goals call for a more conservative approach.

[Read: How to Set Achievable Financial Goals And Plan to Achieve Them]

Step 2: Choose the Right Asset Mix

Once you have set your financial goals, the next step is to choose the right asset mix that align with these objectives.

For short term goals debt funds are more suitable as they offer better stability, while equity mutual funds are more suitable for long term goals because they can be highly volatile in the short run.

Further, based on the risk tolerance one can also adopt a hybrid strategy by investing in a mix of equity and debt. Additionally, allocating some portion in gold and offshore equities can prove to be an effective hedging strategy.

[Read: Asset Allocation: The Cornerstone of Successful Investing]

Step 3: Embrace diversification

The next step is to embrace diversification

Diversification is the cornerstone of successful mutual fund investment. Once you have identified your goals and suitable asset classes, the next step is to suitably diversify your investments within these asset classes.

For instance, within equity mutual funds one has the option to choose from Large Cap Funds, Mid Cap Funds, Small Cap Funds, and Flexi Cap Funds, among others. Large Cap Funds are known to offer steady returns, while Mid and Small Cap Funds have higher growth potential but they also carry higher risk.

Thus, one should carefully decide the allocation within each of these sub-categories based on their goals and investment horizon.

Even within the debt mutual fund category investors have the option to select schemes ranging across durations and credit profiles to match investors' needs.

[Read: How to Earn Respectable Alpha by Creating a Suitable Equity Mutual Fund Portfolio]

Step 4: Prefer Systematic Investment Plans (SIPs)

Moving on investors can prefer the SIP mode for investment

When investing in mutual funds, investors have the option to commit a one-time lump sum amount or to invest a small fixed amount at regular intervals known as the systematic investment plan or SIP

While both methods have the potential to reward investors, investing via the SIP route is one of the most convenient ways to sail through market volatility.

Investing via SIP instils the habit of regular investing regardless of the market conditions which in turn compounds your wealth significantly over a period. It also prevents the risky move of timing the market.

Thus, SIP not only instil discipline but also spread your investment over time, reducing the impact of market fluctuations on your returns, making it suitable for long term investors.

[Read: 5 Key Benefits of Investing in Mutual Funds via SIP]

Step 5: Conduct a Periodic Review

And finally, one should remember to regularly review their portfolio.

Investing is not a one-time process. Although frequent changes to the portfolio must be avoided, one cannot simply follow the invest and forget approach.

Reviewing the portfolio at regular intervals helps you to ensure that your investments are on track to achieve your set financial goals.

When reviewing the portfolio watch out for schemes that may have been consistently underperforming their respective peers and the benchmark and if necessary, replace it better alternatives.

It can also help you to weed out schemes that no longer align with your goals. Additionally, it helps you to identify if there is need to rebalance the portfolio to align with the set asset allocation mix.

Thus, ensure that you review your portfolio at least once a year.

[Read: Why a Mutual Fund Portfolio Review Is Essential in the Current Volatile Market]

Remember, building a Mutual Fund portfolio is a systematic process that requires careful consideration, discipline, and commitment.

By following the steps to create an all-weather portfolio you will be able to avoid making impulsive decisions when the market conditions turn volatile allowing you to achieve your goals with confidence.

Note:  This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Registration granted by SEBI, Membership of BASL and certification from NISM no way guarantee performance of the intermediary or provide any assurance of returns to investors.

The securities quoted are for illustration only and are not recommendatory.

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DIVYA GROVER is the co-editor for FundSelect, the flagship research service of PersonalFN. She is also the co-editor of DebtSelect. Divya is an avid reader which helps her in analysing industry trends and producing insightful articles for PersonalFN’s popular newsletter – Daily Wealth letter, read by over 1.5 lakh subscribers.
Divya joined PersonalFN in 2019 and has since then used stringent quantitative and qualitative parameters to analyse funds to provide honest and unbiased research to investors. She endeavours to enable investors to make an informed investment decision and thereby safeguard their wealth.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.