According to reports from Paisabazaar, mutual fund investors should build portfolios based on asset allocation rather than recent performance. The strategy involves deciding what percentage of total corpus will be allocated among different asset classes such as equity, fixed income, commodities or cash equivalents. Each asset class behaves differently under market conditions - equity offers long-term growth potential but higher volatility, while fixed income provides stability and can help reduce market impact. Gold often performs well during economic uncertainty, acting as a hedge. Investors must determine asset allocation based on factors like age, income, financial goals, risk tolerance and investment horizon.
As reported by Paisabazaar, diversification across and within asset classes is crucial for effective risk management. If an entire corpus is invested in equity funds, investors should spread investments across different asset classes including debt funds, hybrid funds and gold mutual funds or ETFs. Within equity, investors should avoid concentrating large proportions in single sectors, companies or market capitalizations. Large cap funds offer greater stability during volatility, while mid cap and small cap funds have higher return potential but greater volatility. International market allocation can hedge against currency depreciation for education abroad investments.
According to Paisabazaar, discontinuing Systematic Investment Plans during falling markets prevents rupee cost averaging benefits. SIPs spread investments over time, automatically buying more units when NAVs are low and fewer when high, reducing entry-point risk during volatile periods. While monthly SIPs remain preferred for most investors, weekly or daily SIPs may suit those with frequent cash flows. The real benefit lies in maintaining consistent contributions, allowing investors to buy more units at lower prices during market corrections.
As reported by Paisabazaar, market movements can change portfolio asset allocation, requiring periodic reviews every 2-3 years. For example, if initial allocation was 60% equity and 40% debt, strong equity performance may shift the mix to 80% equity and 20% debt. Rebalancing involves redeeming overweight asset classes and increasing underweight ones to restore original allocation. Periodic reviews help identify underperforming funds and unintentional holdings overlap. Investors should avoid frequent changes based on short-term movements, as they can harm portfolio performance.
