'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. Well, traditionally speaking, investments are diversified through a portfolio of various assets like equities, real estate, fixed-income securities, commodities and so on. But what if you're a hardcore mutual fund investor? Will it be possible for you to diversify your mutual fund investments – the right way?
Fortunately, the mutual funds that you hold can already have a diverse holding of 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 own traps that you could fall for inadvertently.
So, 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! Going on adding 'n' number of schemes is not going to help.
Most individuals confuse mutual fund schemes with stocks. They think that 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 would simply be overlapping. Essentially, it's like you're investing your money in the same stocks over and over again. All it does is add to the burden of tracking the performance of multiple schemes repeatedly. At some point, you'll wish you could start from scratch.
On the contrary, a well-diversified investment portfolio will have a good mix of 5-6 different schemes that are performing well. You should invest in different schemes 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 being 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? Well, most of you must also have seen their portfolio performance soaring in the most recent bull market. But, the crash that followed also scared many investors and the panic forced them into selling most of their existing holdings. Essentially, such investments fail to strike a good balance between safety and growth. In the bull ride, you'd witness high growth but during downturns, it holds the potential of wiping off your entire gains or even make losses!
A well-balanced portfolio of mutual funds should ideally include both 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, when compared to large-cap funds. (Large-cap funds mostly invest in blue-chip stocks. These are proven companies that are able to weather turbulent times in a better way as compared to small-caps or mid-caps.)
So, while it depends on your risk appetite, your mutual fund diversification should also consider the aspect of 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 be having 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 need to 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 on a regular basis and that's where the concept of SIP comes into the picture.
To buy your own car three years later, you ought to play safe and invest in debt funds that will generate steady returns for you over a period of three years.
For the other two goals, you ought to determine an amount that 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 the risk-appetite, you can go for partial investments in small-cap and mid-cap funds too. 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 particular sector. It offers you 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! For any help whatsoever, just call our experienced advisors on 022-67136713 or mail email@example.com