Like in most things it is important to have a strategy in investing. However, the lack of an asset allocation strategy is probably the most frequent mistake in mutual fund investing. Most investors are quite clear in identifying their investment objective, but more often then not skip the vital step in establishing a successful portfolio, that of creating a detailed asset allocation strategy.

A work well begun is half the work done. As such, without a well-defined and appropriate asset allocation strategy that accurately reflects individual investment objectives and preferences (time horizon, return objectives, risk tolerance, etc), the selection of mutual funds is haphazard instead of logical.

In most cases, the outcome of recklessly fund selection is inappropriate asset allocation of risk and reward, which in turn leads to ineffective diversification -- the ultimate result is poor or mediocre portfolio performance.

The common pitfalls in asset allocation could be characterised by being over-weight in certain fund types or categories, under-weighting of fund types and/or inappropriate fund types in the portfolio. To achieve effective allocation that fits ones investment objectives and preferences. Investment should be spread among different fund categories to achieve both a variety of distinct risk/reward objectives and a reduction in overall risk.

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Another common mistake is that of having a very large portion of the portfolio assets concentrated in funds with very high risk/reward characteristics. This phenomenon has largely been bought about in the Indian markets due to the huge run up in Technology stocks which made investors flock to Infotech funds.

Though the investments may actually reflect chosen investment objectives. The result is excessive volatility, which in many instances, can cause disappointing portfolio performance because the very large percentage of risk does not justify the potential reward -- in other words, the risk is highly disproportionate to overall profit potential.

However, though being over weight in any one sector is more likely to be a problem in portfolios with aggressive risk tolerances. It can occur with any type of risk tolerance.

Sectoral funds though volatile can fit into many portfolios, provided an investor adheres to the principles of effective diversification: distinct risk/reward objectives within a variety of fund types and a reduction in overall portfolio risk.

A good portfolio would depend on the choices of aggressive, moderate or conservative risk tolerances and growth, balance or income-oriented return objectives. The key is to treat high risk, non-diversified funds as a suitable portfolio supplement without dramatically increasing overall risk.

An investors tends to duplicate funds when one particular type of fund has given him good returns. Inefficient diversification occurs when an investor has two or more funds with identical objectives. If the fund has been chosen right it is usually best to represent a fund category with just one fund.

As such, the underlying common factor in avoiding these three mistakes just boils down to detailed asset allocation. It promotes effective diversification and eliminates the problems associated with haphazard fund selection -- it is the key in establishing a successful mutual fund portfolio.