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Diversification is a major tenet of investing that allows you to get maximum returns from your investment in mutual funds and effectively face the associated volatility. Diversification of a mutual fund portfolio takes place when you include funds with distinct characteristics, which allows you to protect as well as appreciate your corpus simultaneously. So, how can you achieve the goal of diversification in your mutual fund portfolio? Read on to understand.
Important ways to build a well-diversified mutual fund portfolio –
- Consider investing across distinct asset classes according to your requirements
At a fundamental level, your mutual fund portfolio must be disseminated across asset classes such as fixed income, gold, and equity. So, you must factor in parameters like investment goal, risk appetite, investment timeframe and return expectations to choose a fund. Selecting these parameters also makes it simple to determine the asset allocation. For example, if the horizon of your financial goal is 15 years, then your portfolio must have maximum exposure to equity mutual funds. Similarly, your mutual fund portfolio must have higher debt exposure if your financial goal is short term i.e., up to 3 years.
- Look at the mutual fund’s core holdings
It is not uncommon to find investors investing in several fund schemes for attaining the goal of diversification which has similar portfolios. On paper, while it might appear as a diversified portfolio, but in reality, it is not. The schemes might differ, but there’s no diversification at the individual security level. Hence, before you invest, ensure to review the fund’s factsheet and authenticate its holdings. If 2 mutual funds have almost similar holdings, then invest in the fund that has endowed better returns over the long term.
- Add funds from distinct fund houses to your mutual fund portfolio
You can even consider investing in the fund from distinct fund houses to attain the benefit of distinct investment strategies. Few funds tend to follow an aggressive investment approach, while others may stick to a conservative outlook. Likewise, fund houses come with their strength – some of them are good with market cycles, some are good at picking excellent stocks, some may be good at holding large cap equities etc.
- Make investments in thematic funds selectively
Thematic funds have the goal of attaining potential investment options linked with a specific theme or sector. An example of a thematic fund can be of a fund that concentrates on the companies involved in renewable resources or clean energy or artificial intelligence. However, you as an investor must ensure to be careful while picking thematic funds as your entry into the fund and exit from the fund needs to be timed.
Ending note
Your mutual fund portfolio must contain 4-5 distinct funds of different asset class and must be in alignment with your financial goals and risk tolerance level to attain your desired diversification. Never add multiple funds as this can bloat your mutual fund portfolio making it tough for you to track. So, ensure to evaluate your mutual fund portfolio once every 6 months to view its performance. Liquidate those funds that underperform for an extended time period and replace them with high-performing funds.
