Often mutual fund investors think that they do not need to diversify their mutual fund portfolio, as the scheme they are investing in already has different stocks or other securities. However, this is a pure myth, as mutual fund portfolios must be diversified to mitigate risk and increase the return potential.
The right mix of mutual fund schemes can help you earn optimum returns, and you can reduce your risk significantly, but how to do this is the question, isn’t it?
Tips to diversify your mutual fund portfolio easily
Choose the asset class according to your age
Mutual funds are also segregated into two broad asset classes: debt funds and equity funds. Then there are multiple sub-categories within the two categories. To keep it simple, let’s understand how to have the right mix of these two types of funds in your portfolio.
Suppose you are beginning your investment for your retirement at the age of 25, right after getting your first paycheck. Then you can put a higher percentage of your investment budget into equity funds and keep the debt funds percentage in the portfolio to around 20% or 30% as per your risk appetite. This is because you have the time to weather the volatility of equity funds.
However, when you are close to retirement, suppose you are in your 50s, where you have around ten years left to retire. You can invest more into debt funds, which will help you preserve your capital and give a stable return. At this stage of life, you can invest around 80% of your assets into debt funds while keeping 20% in equity funds. Keeping the right mix of equity and debt fund is the key to successful diversification of investment portfolios.
Invest with different fund houses
There are many fund houses in the country which offer hundreds of mutual fund schemes. For wisely diversifying your portfolio, you can add schemes from different fund houses instead of putting all your money into the schemes of a single fund house.
Make sure to check the underlying holdings of the funds
For having a well-diversified portfolio, investing in different funds is not enough. You need to check the core holdings of the funds you are investing in. Suppose you invested in a large-cap fund and an ELSS fund, where the core holdings are almost similar. This will increase the weight of certain stocks in your portfolio, which might not aid in diversification. So, always check a fund’s underlying assets to ensure that there is no severe duplication in your portfolios.
Invest in Multi-asset funds
Investing in multi-asset funds is one of the easiest ways to diversify your mutual fund portfolio. These funds invest in a minimum of three asset classes, which can include gold, equity, debt, real estate, and others. These funds offer better diversification than a single asset fund as the underlying asset classes have less or no correlation with each other. This helps to reduce risk and optimise your returns.
So, next time you pick a fund for your mutual fund portfolio, make sure the fund will help truly diversify the portfolio.
