Mutual funds allow investors to achieve a variety of risk/reward objectives. The right mix of funds also helps in reducing the overall portfolio risk. Therefore, as an investor, your focus should be on identifying the right level of risk tolerance and deciding suitable asset allocation. It is equally important to monitor the performance of the portfolio to ensure that it remains on track to achieve your investment goals. Here are a few Do's and Don'ts to achieve investment success on a consistent basis.

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Invest in line with your risk tolerance

It is important to understand the right meaning of risk. For a mutual fund investor, risk refers to the impact of market fluctuations on the NAVs. However, the impact can be minimised by ascertaining by following an asset allocation strategy and thereafter choosing the right funds. Therefore, your asset allocation must reflect your risk profile. It is important because asset allocation not only reflects the kind of risk you are taking but also the return you can expect over time. Besides, you must invest in funds following different investment philosophies as well as strategies that help you tackle volatility as well as ensures that portfolio works in different market situations.

Don't over diversify your portfolio- Many investors make a mistake of having too many funds in the portfolio, presumably to achieve a higher level of diversification. However, they forget that mutual funds themselves are a diversified investment vehicle and hence having too many funds can be counter-productive. Over-diversification usually results in a portfolio consisting of good as well as bad performing funds. Needless to say, non-performing funds pull down the overall portfolio return. If you are faced with such a situation, you must take stock of the portfolio mix and take steps to weed out non-performing funds as well as realign the portfolio in a manner that funds investing in aggressive segments such as mid-cap and small-cap do not take you beyond your risk-taking capacity.

Avoid following short-term market trends

While it is natural to get affected by the short-term performance of the stock market, it is vital not to allow it to influence your investment strategy. For example, abandoning equity funds during market downturns can be detrimental to the long-term prospects of your mutual fund portfolio. Remember, negative returns during certain periods do not necessarily mean poor performance. Similarly, even a bad fund manager can give decent returns when the markets are doing well. Besides, a fund manager can give impressive returns by exposing investors to higher risk than their accepted level.

Therefore, the right way to remain unaffected by short-term market trends is to follow a disciplined investment process wherein investments are aligned to investment goals with a clearly defined time horizon. Similarly, rebalancing the portfolio to maintain the asset allocation originally decided can be a good strategy to avoid extreme reactions. No doubt, it can be tough at times to redeem in a rising market or to invest in a falling market. However, rebalancing imposes discipline and ensures that the portfolio remains diversified at all times.

Participate actively in the decision-making process

You can benefit immensely by taking help from a professional advisor. However, it is equally important for you to actively participate in the decision-making process. While an advisor can help in terms of determining the course of action and selection of investment options, you still have an important role to play in defining the parameters.

It is equally important to monitor the progress of the portfolio. This will not only help you in assessing the quality of advice you have been getting but also ensure that your portfolio remains on track. Besides, it will keep your advisor on his toes.

Hemant Rustagi, CEO, Wiseinvest Advisors