Forming a Diversified Portfolio of Mutual Funds

Mastering Mutual Fund Investment: Part 3 of 3 Creating a Diversified Portfolio of Mutual Funds
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Transcript

So far in the course, we have studied about different types of mutual funds. And we have also studied how to evaluate the mutual funds. However, we should not put all our money into a single mutual fund, not only in a single mutual fund we should not put all our money into mutual funds only any experienced investor will tell you that the portfolio that one maintains should be diversified, the diversification should be among different instruments, there should be some money put in the fixed income instruments some money put in mutual funds, some money put in shares, etc. discussing how to form a diversified portfolio between different classes of investment instruments is beyond the scope of this course. I am launching a course called mastering portfolio creation in which I will be discussing how to create a portfolio from different investment instruments. This course will focus on mutual funds only.

For the time being let's agree and understand that we need to have a part of our investment Mutual funds. Now, in mutual funds also the portion that we allocate to mutual funds, we should allocate within a diversified portfolio of mutual funds itself. The amount that we allocate to mutual funds in our portfolio should not be put everything into a single mutual fund. Instead, we should create a diversified portfolio of mutual funds for that amount, so that the unsystematic risk is taken care of. In this course, I've introduced you to different kinds of mutual funds, we have mutual funds, which are high risk and high return possibilities, we have mutual funds which are low risk, however, put given low return we have mutual funds which have got a medium amount of risk and possibly can give a high return or give a medium return and all since these combinations are available, you should be able to identify which mutual funds are in which category by now, as a bottom line, we should select different types of mutual funds and allocate them funds are among the different types of mutual funds, it is not necessary that we should select only one mutual fund in each category we can select more than one mutual fund in each category as well.

However, before making this selection, one should be very clear about what is his risk appetite and what is the level of return that one is expecting. These are two very important considerations which needs to be taken into consideration at the very beginning. Oddly then the proper decision can be made also there should be objective, what is the objective of investment investing in mutual funds, the objective could be to get a high returns objective could be to do a tax saving. So, velocity very clear about what is the objective and also want us to clearly assess what is the level of risk the person is ready to take and what is the expectation he he or she has got from the investment in mutual funds when the self assessment objective And goals are clear to a person, he or she can make a good decision regarding how to create a portfolio of mutual funds.

In this section, I will provide a guideline as to how our mutual fund portfolio can be created. However, one should be very clear that this is just a guideline and this is not a recommendation. The guideline is provided for the purpose that the concept be clear as to how this process can be conducted. For the purpose of this discussion, and for understanding the concept, we will create a sample portfolio for the purpose of illustration only this sample portfolio is in no way a recommendation for investment. Now, in the sample portfolio, we will keep three equity funds to debt funds to index funds, one balanced fund, one contract fund and one arbitrage fund. So, we will have a total of 10 mutual funds in our portfolio.

Now, you see that by creating this portfolio we are already creating a diversification at one level that is we are having different types of mutual funds in our portfolio which provides a diversification within each type of mutual funds. We will utilize all the knowledge that we have discussed so far in terms of your evaluation of different mutual funds to make a selection for that type of a mutual fund. For example, to select three equity mutual funds, we will gather a set of mutual funds and put them through assessment which we have learned so far and see which are the best three that we should consider for investment. Here again, I should caution you that this is just an illustration for the purpose of understanding the concept. This is not a recommendation for investment. In the next few videos, we will go through the process of selecting these mutual funds as per our plan.

That is we want three equity funds to debt funds and etc. So we will make sense Have these funds through our criteria that we have already studied so far. Thank you for listening. See you in the next lecture.

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