Mutual funds entered the Indian markets with a bang and have steadily grown to be a multi-billion dollar industry with millions of investors across the country. With the changing preferences of the investors and their growing awareness of the stocks and mutual funds industry in general, mutual funds today have become a staple investment option for millions. But the key question that still remains is how to create a successful mutual fund portfolio.
Most investors at some point would have definitely considered copying the portfolio of a fund manager rather than creating their own from scratch. But is it advisable?
Given below is a brief discussion regarding the same and why it is dangerous to copy a mutual fund portfolio without any analysis on a personal level.
Key factors in creating a mutual fund portfolio
Let us first start with the key factors that are needed to create a mutual fund portfolio. What are?
Some of the key factors that should be considered by investors or the essential ingredients and pathways for a good and balanced mutual fund portfolio are mentioned below.
- Investment objective
The first and foremost factor to consider in mutual fund investment is the investment objective of the fund. The investor has to primarily understand the investment objective of the fund and ascertain if it aligns with their own. The style of investment or the strategies (value investing, growth investing, etc ) have to be clearly understood to have a fair idea of the returns from the fund.
Also Read: TDS on mutual fund investments
- Capital investment
Most investors think they cannot invest in mutual funds due to a lack of funds. However, the beauty of mutual funds is that investors can invest in funds through SIPs as well. This helps them gradually build their portfolio and also has the benefit of compounding.
- Risk and returns expectations
Investors can choose different investment options under mutual funds depending on their individual risk appetites and return perceptions. Aggressive investors usually prefer investing in equity and equity-oriented funds that provide higher returns while risk-averse investors prefer debt funds or hybrid funds to reduce their overall risk of the portfolio but at the same time get more or less stable returns. Investors can also review the past performance of the fund to understand the ability of the fund to generate returns during different market cycles as well as that of the fund manager to navigate the fund through such cycles. While past performance is not a guarantee of future return, they provide a fair estimate of the same.
- Diversification of the portfolio
Another important aspect of creating a successful portfolio is diversification. It is prudent to invest in different types of funds that have varied asset allocations. This will not only help in spreading the risk but will also benefit in earning returns through different assets
The investment horizon of the fund should be in line with that of the investors in order to provide them with their expected returns within their intended time frame.
- Taxation
Mutual funds are subject to taxes depending on the asset composition of the fund. Therefore, it is necessary to be aware of the applicable taxes so as to be aware of the net returns from the fund.
Read more : Which are the best mutual fund apps?
Isn’t copying a mutual fund manager’s portfolio easier?
Creating a mutual fund portfolio from scratch while considering all the above factors and many more can be quite cumbersome. It may not be an easy cup of tea for every investor. In such cases, many investors take the help of professional fund managers to help them curate their portfolio and help them manage it. This will not only remove the hassles of creating a portfolio but will also give the investors a better chance of earning higher returns.
The investors will first have to target the fund that matches their criteria and the cost of investing in terms of the expense ratio. The next step is to have a portfolio with the exact composition of their targetted fund and also the funds to finance their investments. Investors will have to constantly monitor all the developments relating to the mutual fund and alter their investments accordingly.
What are the dangers of copying a mutual fund manager’s portfolio?
The above steps to mimic the mutual fund portfolio sound quite simple but the reality is not the same. It is nearly impossible to exactly replicate a mutual fund on an individual basis. There are several factors that do not go in its favour and pose a hurdle for a successful portfolio. Some of the reasons why it is not a good idea to copy a fund manager’s portfolio are highlighted below.
- Capital investment
A mutual fund has huge funds at its disposal. This allows them to tap the right market opportunities and take maximum advantage of market fluctuations. This is not the case with individual investors. Hence, replicating the exact portfolio is difficult as the individual investors have limited funds that and therefore it is nearly impossible to replicate all the investments and their scale.
- Professional expertise
Fund managers have a hoard of professionals that constantly analyze the markets and stocks to understand their relative positions in the industry and among their peers. They have a constant track of all the latest developments in their target sectors and any factors (on the national and international levels) that can affect the stock prices. Such uninterrupted and close monitoring of the market and target stocks is impossible for small or retail investors.
- Investment strategies
It is not easy to understand the fund manager’s strategies or their reason to enter or exit their investments at any point in time. Most fund houses work based on an in-house model that determines their investment dynamics. Moreover, the details of the mutual fund portfolio are not released on a daily basis. Hence, it is difficult to track portfolio changes in real-time. This is another hurdle in creating a successful portfolio as investors would not be able to match the fast pace of investments and changes in the portfolio made by the fund managers.
- Risk-taking ability
The risk-taking ability of mutual funds is quite higher as compared to individual investors on account of their diversified portfolio and the scale of investment. Retail investors do not have this benefit, especially in the case of risk-averse investors. In the pretext of mimicking the mutual fund portfolio, investors may end up taking more risks or losing even their capital investment if they cannot manage their investments in an optimum manner.
- Lack of information
Investors lack general information regarding the initial price at which the assets of the fund are bought. Also, the target price at which the fund managers aim to liquidate their holdings is not disclosed. Therefore, it is virtually impossible to generate the same kind of returns even if it is considered in terms of percentage if not measured in absolute terms.
Conclusion
Mimicking the fund manager’s portfolio is a risky proposition for retail investors. The investment parameters of a fund can be quite different for an individual investor. Therefore, by blindly copying the found it is quite possible that the investor will end up taking either more risk than their capacity and will have to first and foremost get access to deep pockets that can fund the scale of investments. This is therefore not a viable option and copying a mutual fund portfolio can lead to more losses than higher returns. It is therefore advisable for investors to either take the help of professional fund managers to create their personalized investment portfolio or can use their own rationale by understanding the market dynamics along with their individual constraints.
FAQs
The mutual fund portfolio is public information but it is not provided on a daily basis and in real-time. The time lag for publishing the mutual fund investment portfolio is 10 days.
Copying other investors’ portfolios is of high risk as every investor has their own risk-return parameters and different investment horizon. The copied portfolio may be difficult to manage or may result in losses if it is blindly copied without understanding the market fundamentals.
The common mistakes that should be avoided while creating a portfolio are,
-Investing without any goals
-Investing with all the funds without any proper planning or budgeting for mandatory financial obligations
-Investing without any clear understanding of the market trends and risks in each asset class
-Directly copying another investor’s portfolio without altering it to one’s own risk appetite.
