How to Build a Portfolio of Mutual Funds

In this article, we will learn how to build a portfolio of mutual funds and divide it into internal subheadings using tags.

Using a Core and Satellite Design for the Portfolio

Before you start building, you’ll need a basic design to follow. One of the most famous and commonly used portfolio designs is the core and satellite design. This design starts with the core – a large-cap equity fund – which represents the bulk of your portfolio, and satellites are built around the core, representing smaller parts of your portfolio.

Using Different Types of Fund Classes for Structure

With the large-cap equity fund as the core of your portfolio, you will use different types of funds – the satellites – to complete the structure of your mutual fund portfolio. These other funds may include mid-cap equity funds, small-cap equity funds, foreign equity funds, fixed-income funds (bonds), sector funds, and money market funds.

Understanding Your Risk Tolerance

Before selecting funds, you should have a good idea of your risk tolerance. Risk tolerance is a measure of how much market volatility you can withstand. For example, if you feel very anxious when your account value drops by 10% (to $9,000) over a one-year period, your risk tolerance is relatively low – you cannot handle high-risk investments.

Determining Your Asset Allocation

Once you have determined your risk tolerance level, you can specify your asset allocation, which is the mix of investment assets – stocks, bonds, and cash – that make up your portfolio. The optimal asset allocation will reflect your risk tolerance level, which can be described as aggressive (high risk tolerance), moderate (medium risk tolerance), or conservative (low risk tolerance). The higher your risk tolerance, the greater the proportion of stocks in your portfolio compared to bonds and cash, and the lower your risk tolerance, the lower the proportion of stocks in your portfolio compared to bonds and cash.

Learning How to Choose the Best Funds

Now that you understand your asset allocation, all that remains is to choose the best funds for you. If you have a wide range of mutual funds to choose from, you can start by using a fund screening tool or comparing performance with an index. You will also want to consider important fund attributes, such as fund fees, expenses, and the fund’s management duration.

Some Additional Tips and Warnings for Building a Mutual Fund Portfolio

If you are a beginner, you may not have enough money to meet the minimum initial investment, which often exceeds $1,000 for each mutual fund. If you can only meet the minimum for one fund, start with the core, such as a low-cost large-cap equity fund or a balanced fund. Once you purchase the first fund for your portfolio, you can save money on the side to buy the next fund and continue building your portfolio one fund at a time.

The old way of asset allocation was “investing according to your age,” where your age is the number of bonds in your portfolio. For example, if you are 40 years old, your asset allocation would be 40% bonds and 60% stocks. Today, people are living longer, so this asset allocation strategy is no longer as valid as it once was.

Please

Note that the information provided here is for discussion purposes only and should not be construed as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.

Source: https://www.thebalancemoney.com/how-to-build-a-portfolio-of-mutual-funds-2466532