Here’s How Conservative Investors Should Build A Mutual Fund Portfolio
Apr 05, 2019

Author: Aditi Murkute

(Image source: Image by Gino Crescolia on pixabay)

Due to accelerating inflation, investing prudently has become a necessity for a prosperous future. I want to point out that investing is an individualistic exercise, based on one's investment objective, time horizon, and risk profile.

Foremost understand that in finance all investments carry a certain level of risk since the return on investment is not guaranteed. Risk is defined as the possibility of loss of money

A conservative investor's prime concern is preservation of capital.

So, are you a conservative investor?

If the answer is yes, then read on...

Anyone, senior citizen or millennial, can be a conservative investor. Simply put, a conservative investor is unwilling to take any form of investment risk and seeks a high level of security of principal, guaranteed income and stable returns through dividends or interest.

Generally, people with short term goals, more responsibilities to shoulder, and/or are about to retire within few years prefer investments which guarantee a positive fixed return. And hence fixed-term deposits or government schemes like Sukanya Samriddhi Schemes (SSS), PPF, NSC, or KVP are part of a conservative's portfolio to earn returns with minimum risk to capital.

In addition to this, with advancing age and decreasing investment time horizon the willingness to take risk deteriorates.

Table 1: Risk capability diminishes with age

stragicy
(For illustrative purpose)

For example, a 35-year-old person can absorb a loss of Rs 5 lakh and forget about it five years later if he earns better returns. That's because he has more time to recover from the bad phase of riskier assets and therefore can afford to take higher risk.

In contrast, sustaining a similar loss may not be feasible for a 58-year-old person approaching his retirement in the next few years.

Similarly, as you move closer to your investment goal like buying a home or sending your child abroad for higher studies, say in the next two years, you are likely to secure your capital, taking minimum risk and accepting nominal returns.

[Read: How To Improve Your Return On Investments?]

Table 2: Risk capability diminishes with a decrease in time horizon

stragicy
(This table is indicative and for illustration purpose only)

As a conservative investor, here's how you can create a diversified portfolio by investing in various asset classes:

Graph: Indicative asset allocation

stragicy
(For illustrative purpose)

Investing in mutual funds would be beneficial for you as it ensures diversification that curtails the risk as per your risk profile and can generate better returns if you allocate some portion to equity funds.

Being a conservative investor, you strictly avoid equity investments due to the high volatility of this asset class. But remember the trade-off is a relatively low return on the investment and will not combat inflation. Your money will essentially lose its value.

If you will allocate some portion of your investments to equity funds that have been researched by a reputed fund house, it could increase your total rate of return while maintaining a relatively low level of risk.

[Read: Willing To Take Some Investment Risk? Mutual Funds Are Your Best Bet]

In the table below, the data suggests an asset allocation of equity funds and debt funds for conservative investors who have an investment time horizon of at least five years.

Table 3: Suggestive portfolio of a conservative investor

Portfolio Type Conservative
Equity Funds  
Large Cap 15% to 20%
Multi-Cap 0% to 10%
Value Style 0% to 20%
Aggressive Hybrid 10% to 15%
Debt Funds
Corporate Bond 20% to 30%
Dynamic Bond 10% to 20%
Ultra-Short Duration Fund 10% to 15%
Liquid Fund 0% to 5%
Gold Fund 5% to 10%
(Note: The table chart is for illustrative purpose only)

[Read: Best SIPs To Invest In 2019]

In fact, there isn't any ideal set asset allocation to invest for a conservative investor (or any kind of investor). As mentioned earlier, investing is an individualistic exercise and your ability to take risks is circumstantial and depends on a lot of factors.

Hence, begin by defining your financial goals and assessing your risk profile before you invest in any fund. It could be a daunting task to do it all by yourself because of the research involved in choosing the right fund.

Be sure to consult an ethical, unbiased, certified, and well experienced financial planner from a reputed company to guide you in creating your own personalised strategic portfolio.  PersonalFN's Planning department has been operational since 2000, and over the course of these 18 years has amassed a loyal clientele; clients who have trusted the company for 18 years because of the value they've received.

Editor's note:As per your risk appetite, you need to make strategic and productive investments in mutual funds that will help counter inflation and achieve your financial goals. Investing only in fixed deposits or government schemes is the least effective way towards financial freedom.

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