Mutual Fund Portfolio Diversification: How to Spread Your Risk
Putting all your eggs in one basket leads to unnecessarily increased risk. If the entirety of your investment budget is allocated to a single security, it can be catastrophic if that asset does not yield the expected return. Mutual funds alleviate this problem by distributing the investors’ funds across various assets and securities.
Managing risks is just as important as maximising returns. The best way to do that is to avoid accumulating all the risk in one place and instead, spread it across different securities. In this article, we shall explore how diversifying your investment portfolio gives you a stronger arsenal to combat risks.
Portfolio diversification is a strategy aimed at minimising an investor’s vulnerability to risk by allocating investment funds to a variety of assets, such as equities, bonds, gold, commodities, ETFs, hybrid funds, or index mutual funds.
In simpler terms, if you invest all your money in, say, one company’s equity shares, and it performs poorly over time because of an equity market dip, then you will have to incur significant losses. On the other hand, if you had invested a portion in debt or index funds, you could have still gained returns from these investments.
How to Diversify Your Portfolio?
Building a well-diversified portfolio is not difficult if done strategically and thoughtfully. Here are some steps you can take to mitigate risks through portfolio diversification.
Assorted Fund Types: A range of funds is available for investment. Mutual funds that predominantly invest in equity stocks are referred to as equity funds, which, like equity funds, are likely to provide high returns at the cost of high risk.
Similarly, there are debt funds for those who prioritise stability, as in the case of debt investment. There are hybrid funds that strike a balance, as well as liquid funds for short-term needs. It is a good idea to invest in a variety of such funds.
Different Industries: Diversification is not limited to the type of securities, but also to the sector or industry of the economy to which they belong. Select different mutual funds that invest in various sectors, such as IT, healthcare, real estate, or finance, to avoid overconcentration in a single industry.
Investment Goals: Your investment decisions should align with your various financial goals, whether they are short-term, such as purchasing a new vehicle soon, or long-term, like retirement planning. Opt for various types of funds that are suitable for all your diverse investment objectives.
SIP: While a systematic investment plan (SIP) may not directly aid diversification, it can help you average out market volatility to bring consistency in your investments and lower risks.
Benefits of Portfolio Diversification
Having understood the ways to diversify your mutual fund portfolio, it is worth knowing how it will impact you and benefit your investments.
The underperformance of one asset is no longer a significant risk due to the safety net provided by other assets.
Exposure to various markets not only reduces risk but also expands the scope of earnings from different investments.
Different funds mean different lock-in periods, which boosts liquidity as withdrawing investments becomes easier and you can access money when you need.
With facilities like MF online, you can digitally track all your diversified investments without any hassle.
Conclusion
To earn steady and stable returns, it is crucial to diversify your investment portfolio by holding a variety of assets. This diversification can be achieved by investing across various securities and industries, in pursuit of diverse financial goals. By grasping and utilising the principles of portfolio diversification, you pave the way for wiser, safer, and more sustainable investment success.
Bajaj Finserv helps you grow your wealth with a diversified range of mutual funds. With numerous schemes available on the platform, you can invest in equity funds, debt funds, NFO, hybrid funds, as well as tax saver funds. Manage your financial portfolio digitally from a single platform that provides a seamless investing experience.
