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'Diversification' is one of the most important aspects of investing. You, as an investor, may earn superior returns at the least possible risk with a Well-Diversified Investment Portfolio.
Traditionally, investment diversification through a portfolio of various assets like equities, real estate, fixed-income securities, commodities, etc. But what if you' re a hardcore mutual fund investor? Is it possible for you to diversify your mutual fund investments – the right way?
Fortunately, the mutual funds you hold can already have diverse securities, including equities and bonds. The fund manager of your mutual fund ensures not all your eggs are put in one basket and accordingly builds a well-diversified portfolio of stocks.
But, like any other investment, mutual fund investments have their traps that you could fall for inadvertently.
To achieve true diversification in your mutual fund investments, here are some key pointers that will help you improve your portfolio significantly.
- Choose Schemes Having Different Benchmarks:
Achieve true diversification in mutual fund investments. Start by minimizing the number of schemes in your portfolio to just 5-6. Yes, you read it right! Adding 'n' the number of schemes will be a challenge.
Most individuals confuse mutual fund schemes with stocks. They think they have a better chance of winning if they hold different schemes each time they invest! Well, that's entirely wrong thinking. If you check the assets of such mutual funds, over 70-75% of the stock investments will overlap.
Essentially, it's like you' re investing your money in the same stocks repeatedly. All it does is repeatedly added to the burden of tracking multiple schemes' performance. At some point, you' ll wish to start from scratch.
On the contrary, a well-diversified investment portfolio will have a good mix of 5-6 different schemes performing well. You should invest in various systems by identifying their stock investments, benchmark indexes, MF categories, market risk factors, etc.
To break things down, your investment should look like a good scheme from each of these categories:
- Small and Mid-cap Funds
- Large-cap Funds
- Diversified Funds
- Balanced/Debt Funds
- Thematic Funds
- ELSS Funds
This will ensure your investments are diversified into quality stocks while you enjoy the bull ride in the market.
- Strike a Good Balance of Safety and Growth:
Heard about market cycles? Most of you must also have seen your portfolio performance soaring in the most recent bull market. But, the crash that followed scared many investors, and the panic forced them into selling most of their existing holdings.
Such investments could have struck a better balance between safety and growth. In the bull ride, you'd witness high growth, but during downturns, it can potentially wipe off your entire gains or even make losses!
A well-balanced Mutual Fund Portfolio should ideally include debt and equity funds. Also, there should be a good balance within the equity funds.
For instance, Mid-caps and Small-caps tend to be highly volatile compared to Large-cap funds. (Large-cap funds mostly invest in blue-chip stocks. These are proven companies that can weather turbulent times in a better way as compared to small-caps or mid-caps.)
While it depends on your risk appetite, your mutual fund diversification should also consider including large-caps and debt mutual funds. For during turbulent times in the market, these are the only funds that you can rely on to perform better than the others!
- Diversification should be Goal-Based:
Why do you make investments? For most of you, it must be a specific goal that will have to be achieved at the end of a particular investment tenure. Right?
But then, you might have various investment objectives, and the timeline for each goal may differ. So there's a need to diversify your investments based on your goals.
Say, for instance, you' re starting your investments with three different goals in mind:
- Buying a car: 3 years
- Buying Own House:15 years
- Children's Higher Education: 20 years
This is an ideal case where you must diversify your mutual fund investments. Since stock markets tend to generate higher returns over the longer term, you must invest in a balanced way! Essentially, such goals require you to invest regularly, and that's where the concept of SIP comes into the picture.
To buy your car three years later, you ought to play safe and invest in Debt Funds that will generate steady returns for you for three years.
For the other two goals, you ought to determine an amount you'd require at the end of the tenure and invest accordingly in separate funds. Here, you’ re cushioned by better timelines. If you have a risk appetite, you can also go for partial investments in Small-cap and Mid-cap funds. This will generate superior returns but with added risk.
Eventually, it all draws down to three things: Risk, Reward, and Diversification.
Diversification, even in a particular Asset class, Mutual funds, for instance, enables you to reduce your exposure to a specific sector. It offers exposure to a broader spectrum of Stocks, Sectors, and Securities, potentially reducing the Volatility in your investment.
In the event of an Economic Slump, Diversification is the key that protects you from Severe Losses, eventually offering you Higher Returns.
Armed with such compelling information, it’s the perfect time to start your journey of diversified investing with AI based Portfolio Management Services!
