Mutual Fund Investments are referred to as the best option for one’s wealth generation, by many experts, but at the same time, it is also a fact that mutual fund investments are subject to market risk. Well, experts believe, that Diversification in investor’s Mutual Fund Portfolio, helps them to manage unsystematic risks in their investments.
You must have heard about a proverb, ‘Don’t put all your eggs in one basket’, similarly in Mutual Fund Investment, experts or financial advisors, advise, not to concentrate on a single kind of fund scheme, and invest all your fund in that, rather divide your fund into different amounts and invest in a different kind of mutual fund scheme.
Through this blog, we are going to explain to you the importance of Diversifying your Mutual Fund Portfolio. Read this blog and get to know everything about Diversification in Mutual Fund Portfolio.
WHAT IS MUTUAL FUND DIVERSIFICATION?
Mutual Fund Diversification basically refers to the asset allocation in one’s investment, which aims to reduce the risk in investments. Diversification in Mutual fund Portfolio means, spreading your funds between different mutual funds schemes, like Equity Funds (Large-cap, small-cap, mid-cap, multi-cap), Debt funds (liquid funds, short-term funds, ultra-short-term funds), Hybrid Funds and others, in order to minimize the risk and increase the return.
Each kind of mutual fund scheme is based on some specific objective and has its own benefits and returns, different kinds of schemes in your portfolio, helps you attain the benefits of different schemes, with reduced risks.
Investing in different categories of mutual fund schemes, helps you increase the growth possibility and help in managing the potential risks. For instance, suppose you invested in two different mutual fund schemes, the performances of one scheme goes down, but the other scheme performance was good, thus the yield generated was high, this instance balances the overall performance of your portfolio and helps to offset the losses in your portfolio. Therefore, diversification becomes more important.
BENEFITS OF DIVERSIFICATION IN MUTUAL FUND PORTFOLIO
You must have heard, it is said in Hindi- “Ek se bhale do, do se bhale chaar”.
Some of the benefits of diversification in the mutual fund portfolio:
- Minimizing risk of loss: Investors who concentrate on a particular Mutual Fund Scheme and invests all his capital in the same, they will receive a good amount of return if the value of the assets goes up, but conditions will turn upside down if the value of the assets goes low in the market. On the other hand, investing in different assets or sectors ensure that if one sector is performing poorly, then the other investments may perform better, thereby minimizing the potential risks or losses, do remember, portfolio diversification can only reduce the risk, but cannot nullify the market fluctuations affect on your investment.
- Wide Choice of Assets: When you diversify your mutual fund portfolio, you basically add or invest in different categories of the mutual fund. For example, suppose you invested 40% of your fund in Debt and 60% in Equity mutual fund. Debt funds are short-term investments that yield good returns over three years of investment, and Equity Funds are long-term investments, that give good returns in five or more years of investments. Get happy, as you are going to get the benefits of both, short- -term and long-term investments.
- Avoiding losses due to bad timing: While diversifying your mutual fund portfolio, you add both kinds of investment funds, short-term and long-term. Your long-term investments help you to cover the risk occurred due to market fluctuations and helps you avoid the losses due to bad timing, don’t forget, your short-term fund is also earning for you at the same time!
HOW MANY SCHEMES SHOULD BE ADDED IN YOUR MUTUAL FUND PORTFOLIO?
Well, it is a general question asked by many investors, at the time, they diversify their mutual fund portfolio, how many funds should be added? There is not any ideal number of funds fixed, that should be added to your portfolio, however, it is said that:
- The minimum number of schemes that you must have in your portfolio are 3-4.
- The maximum number of schemes that you must have in your portfolio must not be more than 10.
As of now, you must have understood the concept of Diversification in Mutual fund Portfolio, and its benefits. To reduce the risk in investment and increase the return yield from the assets, investors are suggested to go for diversification in their investment, by mutual fund experts. So, if you are planning your investment in a mutual fund, don’t forget to diversify your portfolio, either you will miss enjoying the benefits of different mutual fund schemes.
Most importantly, always consult a financial planner or advisor, before starting your investments. They will help you select the best fund, for your investments as per your requirement.
You can also contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).