Mutual funds offer better returns than other investment tools but are also extremely risky. Diversification is crucial for dealing with the volatility associated with every mutual fund investment. By adding different asset classes to your mutual fund portfolio, you will be able to ensure the decline in the value of one asset can be tackled by another.
Diversification saves you from losing your entire investment when a portfolio component isn’t performing well. But how do you achieve the diversification of your mutual fund portfolio? Understand the different ways to achieve mutual fund portfolio diversification below.
Choose Index Funds
Index funds are a prudent choice for diversifying your portfolio. The purpose of index funds is to replicate the index they are following. They imitate the index by having stocks in equal proportion. Index funds are passively managed, which helps reduce their investment cost.
Focus on Multi-Asset Allocation
Investors with long-term goals who remain invested for five years or more will benefit from multi-asset allocation. Investors may profit from market uptrends with the help of the scheme’s equity class component. Meanwhile, market downtrends can be mitigated with the help of the debt class component.
Due to its potential for stability across market cycles, the commodity asset type acts as a buffer. Therefore, increasing the size of your portfolio by incorporating multi-asset allocation strategies can prove to be a wise financial choice.
Invest Across Asset Classes According to Your Requirements
Your portfolio should be distributed among asset groups, such as equities, fixed income, and gold. Mutual funds provide various funds within each asset type, offering customers a wide range of options. You can choose the appropriate fund for your portfolio based on factors like your investment goal, time span, risk tolerance, and return expectations. For instance, the portfolio should have a higher exposure to equities if your objective is 15 years away. In the same way, if buying a vehicle within the next two years is your objective, the portfolio should contain more debt funds.
Choose Funds from Different Fund Houses
Investors often rely on different fund houses and focus on different investment strategies to diversify mutual fund portfolios. While some fund houses might stick to a conservative style, others might be more aggressive in their approach.
Moreover, every fund house will have its own areas of strength. Different fund houses will be good at different aspects like stock picking, identifying the multi-baggers, or managing market cycles.
Check the Core Holdings of the Fund
Investors often invest in multiple schemes for the purpose of diversification but end up owning schemes with similar portfolios. Investing in multiple schemes might appear as diversification on paper, but in reality, it’s not. Despite varieties in the scheme, you won’t find much diversification at the level of individual securities.
Before investing in a fund, check its factsheet to find out about the holdings. If you discover two funds with similar holdings, you should go for the one that has offered higher returns in the long run.
Be Selective About Investing in Thematic Funds
Thematic funds revolve around offering investment opportunities related to a specific theme or sector. For instance, thematic funds can include companies offering clean energy or renewable resources. Another set of thematic funds might include leading companies in the artificial intelligence field.
If the theme clicks, the funds will offer hefty returns. But the opposite can happen when the theme fizzles out. Therefore, invest in thematic funds carefully and plan the entry and exit at the right time.
A mutual fund portfolio with up to five funds from different asset classes to meet your financial goals and risk appetite is enough for diversification. To achieve mutual fund portfolio diversification, avoid opting for too many funds.