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Principled Approach

Building a good mutual fund portfolio is an easy task if investors follow certain principles…

I am investing Rs 8,000 per month in BSL Tax Relief 96 and want to diversify my portfolio to other equity funds. Please let know the top 10 equity funds that I can invest in including other ELSS schemes that I can invest in?
- Manish Kamal

BSL Tax Relief 96 is a 3-star rated tax planning fund that earned an annualized 7.07 per cent in the past three years and 8.26 per cent in the past five years, which is not near what the best in the category earned. Investing in tax planning funds provide you with the dual benefit of tax deductions on investments and gains from equity exposure. However, fund selection is key and this fund has been not as consistent in performance as some of the better performing funds in this category such as Canara Robeco Equity Tax Saver or Fidelity Tax Advantage.

However, you have started with the right fund category to build a mutual fund portfolio. Building a mutual fund portfolio is an easy task if you follow certain principles. Most investors hunt for high returns first and some stop right there, inviting absolute disaster. Others go on to glance at risk, then make a cursory check of the expenses and finally think about how a fund fits in with the rest of their investment plans. By reversing that order, you can vastly improve the odds of finding the right fund. Instead of looking for ten best funds, you should work to build a diversified portfolio comprising funds from different categories that collectively suit your risk and investment needs.

Start building the portfolio based on the core and satellite approach which will provide the necessary diversification as well as stability in your portfolio. Ideally, you should look at investing 70-80 per cent in core funds and the remaining in satellite funds. You can have 2-3 funds as core holdings comprising large-cap and large- and mid-cap funds, with the satellite component made of sector funds and mid- and small-cap funds to provide the necessary fillip to achieve long-term wealth appreciation. This approach will be able to absorb shocks as well and have the potential to earn higher returns over various market cycles. Finally, invest through systematic investment plans which discipline you to invest regularly and track the performance of these funds at least once a year to assess the progress of the selected funds.

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