There is no single process that one can stick to while selecting a mutual fund scheme since there are so many options available in the market today.

But what one can do is create a buying process for mutual fund portfolio and keep an eye on the best funds available in the market.

One thing to note here is that by now you should have already determined S.M.A.R.T. goals and have determined the risk profile for your portfolio which would be the skeleton of the portfolio going forward.

In this article, we would like to understand the things that we need to keep in mind while designing a buying process.

7 important things to keep in mind while designing a buying process –

1. Core and Satellite Portfolio Strategy

This is the very basic structure of the portfolio. The core of the portfolio usually represents the overall risk appetite of the portfolio and will form the major part of the overall portfolio with an allocation of around 60% – 75% of the portfolio.

Whereas the satellite part of the portfolio will be aimed towards giving the portfolio an extra return (alpha) up and above the core and hence increase the overall return of the portfolio.

Satellite constitutes approximately 25% to 40% of the portfolio.

Core and Satellite Portfolio

Core and Satellite portfolio for Conservative profile –

Asset Allocation in Core and satellite portfolio

As one can see from the table above, the Core of the portfolio is in line with the risk profile of the investor where 75% of the total portfolio is invested in Cash, Short term and Gold, and Long term debt instruments.

Whereas the Satellite part of the portfolio constitutes  25% of the portfolio invested in Large-cap(20%) and Gold (5%) where the main aim of the satellite part is to generate alpha for the investor.

Asset allocation in core and satellite portfolio


2. Expense

There are two modes of investments Regular (investing through intermediaries ) and Direct (investing directly through the AMC) and direct mode of investment is more cost-effective and it amounts to a whole lot in value over the long term due to the compounding effect hence it is advisable to opt for the direct route of investments.

There are various DIY (Do It Yourself) options available that by taking small advisory fees do a proper financial planning and help in the direct mode of investment.

3. High turnover

Turnover ratio is defined as the percentage of the securities of the portfolio that has been replaced (turned over) over a period of 1 year e.g. if a fund has 60% turnover ratio it implies that the fund has replaced 60 securities out of every 100 securities held in the portfolio in a year.

 This parameter has a very high significance as a fund with high turnover ratio means that the fund manager is having less conviction to the securities purchases .

It also means a higher cost to the investor as every time a buy or sell of security happens there is a brokerage cost that the investor has to incur.

Whereas a lesser turnover ratio essentially means a buy and hold kind of a strategy with the lesser cost being incurred.

4. Team

Apart from various qualitative parameters, it is very important to know the team that is managing the fund. The track record of the fund manager, his approach towards investments, and the process and the stock selection strategies that he deploys towards the selection of securities.

 There have been instances where a fund has underperformed when the fund manager has left.

Apart from that, it is also equally important to understand the ethics of the AMC that is managing the fund and the processes that they have laid down as a check to various strategies of deployment of investor’s money toward the funds.

5. Ratio’s

There are lots of websites, blogs, research articles and viewpoints on television that keep on recommending mutual fund scheme but as a part of devising one’s own process, one can look into the details of these mutual funds through various ratios to come to a conclusion regarding which is a better fund.

 Some of the key ratios are standard deviation, Sharpe ratio, beta of the portfolio, alpha of the portfolio, Sortino ratio, etc.

6. Diversification of asset

While selecting a mutual fund it is important to understand the diversification strategy of the fund. One should avoid a very high exposure to any specific sector, what is the quality of securities being held in the portfolio, whether the fund manager is actively managing the portfolio with changing market conditions, global environment, trade relations etc.