Opinion: How to Create a Mutual Fund Dream Team

Mutual Fund Dream Team

Mutual Funds are excellent investment products that can help investors build long-term wealth. However, the sheer number of mutual funds and their classification across different categories can be overwhelming for investors. There are 36 categories of mutual funds across equity, debt, and hybrid funds with over 2,000 mutual fund schemes in total. These massive numbers may leave investors confused about which categories or funds are best for them.

To help you figure this out, we have used a comparison between a T20 cricket team and a mutual fund portfolio. To your surprise there are more similarities than you think between how a successful T20 team is built and how a successful MF portfolio can be constructed.

Similarities in Selecting a Cricket Team and Mutual Funds

Both MF portfolio and a T20 cricket team require a strong foundation. While a cricket team needs good batsmen and bowlers who can score runs and defend a score, respectively, an MF portfolio needs funds that can accumulate wealth and also those that can manage the inherent risk in the portfolio.

Likewise, whereas the proper position of each player in the T20 cricket team is significant, the category and scheme of different MFs in the portfolio should work in unison for good returns.

The formation of the T20 team comprises the top two batsmen in the opening positions with the best accumulators coming in at No 3 and 4. The international player usually follows at No 5 while the all-rounder is at No 6 and the slogger at No 7.

It’s imperative to know about each position vis-à-vis their relevance with diverse MF categories:

Top Scorers

Typically, the top scorer enters the field first and with his/her consistent performance is generally the match-winner. Thanks to these traits, this player will be one of the team’s most expensive buys.

Similarly, the large-cap MFs are like T20’s leading scorers. These funds primarily invest in India’s top 100 companies, which are some of the country’s biggest brands. If India’s economy is humming, the maximum benefits are reaped by the large-cap funds. But if the economy runs into rough weather, these MFs also experience volatility. Nonetheless, the companies where these MFs invest are capable of speedily resolving their problems and emerging faster from downturn distress.

The Accumulators

Positions 3 and 4 are then managed by the accumulators, who are adept at maintaining a robust run rate in the middle overs by running quick singles and doubles, while also hitting boundaries. If needed, they can also bring a faltering inning on track. The skills of these players ensure the conditions are ripe for a full-scale assault in the closing 6 to 7 overs.

In an MF portfolio, the role of accumulators is handled by multi-cap funds, which invest in companies of diverse types, sizes, and sectors. Through them, investors can participate in large, mid, and small-cap companies.

While multi-cap funds may occasionally perform better than large caps, in the long run, this comes with the extra risk that fund managers take. As the funds invest in medium and small companies, there is a somewhat higher risk. The performance of these funds is like the quick singles and doubles stolen during a match, which is as critical as scoring boundaries.

The International Player

In a T20 team, international players provide the benefits of diversification and an edge over other teams. Their role is like that of international funds in an MF portfolio.

Through international exposure in their portfolio, MF investors stand to gain much. It is necessary to invest in international funds due to the outstanding performance of MNCs and the diversification of the portfolio through these funds. For instance, companies such as Microsoft, Google and Amazon are the top rankers in their domains, thereby delivering stupendous returns to shareholders.

The All-rounder

The all-rounders are proficient in both batting and bowling, playing the dual roles of scoring additional runs and also saving runs. Furthermore, all-rounders play according to the ground conditions, knowing when to bat aggressively or play sedately to accumulate runs.

Like all-rounders, Balanced Advantage Funds know how to function as per market conditions. Also termed Dynamic Asset Allocation Funds, these are included in a portfolio to provide risk-adjusted returns by maintaining the balance between risks and returns. This is done by automatically adjusting funds allocation to debt and equity. All-rounder funds ascertain investors receive consistent returns in all conditions through minimum risk-taking.

The Slogger

The last batter has his/her risks – he/she may hit a six or get caught. In the same manner, a Mid-cap Fund provides acceleration to an MF portfolio by investing in medium-sized companies. Much like the last batter, these funds perform in cycles – hitting sixes or getting caught.  Whereas mid-cap funds entail risks, in some instances they have also delivered outstanding returns.

The above comparison makes it apparent that building an MF portfolio can be as easy or complex as creating a T20 team. All investors must do is pinpoint the strong and weak points of various funds and then create a portfolio that can balance both risks and returns. Thereby, stability and diversity can be maintained.

This article is contributed by ET Money. Views expressed in this article are the personal opinion of the contributor.

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