How to Diversify Your Portfolio when Navigating the Mutual Fund Market?

 

When investing in market-linked instruments like mutual funds, diversification is an essential tool to manage your portfolio risk. In this blog, we learn more about a mutual fund, the concept of diversification and how you can diversify your portfolio when navigating the mutual fund market.

What is a Diversified Mutual Fund Portfolio?

A mutual fund is an investment medium that pools money from various investors, which a professional fund manager further invests into different stocks, securities, and other asset classes.

There are primarily two different ways in which portfolio diversification works. These are:

• Instant diversification

When investing in a particular mutual fund scheme, you buy units of a fund that invests in various securities, thus giving you the advantage of instant diversification by investing in one single scheme.

• Portfolio diversification

As a mutual fund investor, it is best to opt for portfolio diversification if you want to optimise your returns. Here, you purchase different types of mutual funds that invest in various asset classes/securities that are not correlated.

How to Diversify Your Portfolio When Navigating Mutual Fund Investments?

When looking to diversify your portfolio, mutual funds offer an excellent choice as you do not need to have a detailed understanding of each asset class to reach your portfolio diversification goals. All you need to do to diversify your portfolio is start investing in Indian mutual fund schemes that invest across asset classes to spread your risks and give you better returns.

The mutual funds you need to target to diversify your investments are-

• Equity-based mutual funds- As the name suggests, equity mutual funds invest primarily in equities and equity-related instruments. Based on factors such as risk tolerance, age, and financial goals, you can invest in various equity funds such as small-cap, mid-cap, large-cap and more. To diversify your portfolio, the key here is to analyse the schemes thoroughly and choose the ones that invest across varied industries and different asset classes.

• Debt-based mutual funds-: Debt mutual funds primarily invest in different debt instruments such as money market schemes, T-bills, corporate bonds, and more. The advantage of investing in debt funds is higher liquidity than other traditional debt instruments and better returns over a fixed period.
• Balanced mutual funds: - As the name suggests, a balanced fund refers to the hybrid mutual fund covering both equity and debt schemes. These funds are best suited for beginners with little or no risk appetite. 

Tips to Diversify Your Mutual Fund Portfolio

Here are some of the other tips to help you better understand what a mutual fund is and how to diversify your portfolio-

• Maintain a balance between various schemes 

The need for diversification varies based on factors such as age, risk appetite and expected returns over a period. For instance, while a person in their early 20s might require diversification of their mutual fund portfolio with more exposure to equity instruments, an investor in their 60s may require more exposure to debt schemes.

• Diversify based on the investment time horizon

Besides diversifying across different types of mutual funds, it is also important to consider a time horizon while diversifying your portfolio. The risk levels also vary depending on how long you are invested in a particular scheme. Investing in two different funds with different time horizons gives you the benefit of averaging out the risk.  

• Invest through different fund houses

Investing in mutual funds through various fund houses and leveraging the expertise of different fund managers allows you to beat the volatile market conditions and get better returns overall.

To Wrap

When diversifying your mutual fund portfolio, the key is to navigate the market carefully and spread your investment across different companies, various sectors, and multiple asset classes to get the maximum out of your invested funds and schemes.

If you are also looking to diversify your mutual fund portfolio, PGIM offers an excellent platform to invest across asset classes and accomplish your primary task, which is to grow your financial wealth over time while minimising risk by reducing volatility.

5 Reasons You Simply Cannot Avoid Unit Linked Insurance Plans

 

Unit linked insurance plans are a very good option and have become quite popular these days. The benefits are many, and it is perhaps a very important form of investment to think about. The first thing to understand is what exactly is an unit-linked insurance plan. Essentially when you invest in such a plan, the insurance company uses part of the premium in shares, bonds etc. The balance amount provides the insurance cover. Since insurance companies have on their payroll fund managers, the investor is spared the need of managing the investments. The experts within the company handle these for the investor. Depending on your instructions, the insurance company will deploy the funds. The great thing is that you can switch from ne form of investment to another if you so desire. However, keep in mind that the lock-in period is now 5 years. But in such investments, the benefits only accrue over a period of time.

Benefits of Unit Linked Insurance Plans.

The first benefit is that the plan offers a life cover. This is useful as the cover protects the investor in case of his untimely death. His family is protected financially. At the same time, the investment portion is working to generate money. 

The second benefit is Income Tax benefits. Under this plan, premiums paid are exempt from tax under Section 80C. In addition, the returns under the policy on maturity are also exempt from tax under Section 10 (10D) under the Income Tax act. There is thus a dual benefit. 

Financing long term goals is another advantage of this plan. If the goal is to buy a house after a certain time, this plan works to ensure that the funds are available and tax-free at that time. Therefore, investing in a unit-linked insurance plan is the best way forward. Considering the current interest rates being offered, investing in a fixed deposit with the bank does not bring good returns. The unit-linked insurance offers a larger return, although over a period of time. However, all investments generally yield results over a period of time. And the unit-linked insurance plan works in the same way. The planning for this needs to be a long term plan. It is possible to exit the plan after the lock-in period 5 years, but the gains are not as much as a longer time investment, say for 10 years minimum. 

Switching of investment instruments to be used by the insurance company is also a great benefit. Normally the insurance companies allow a number switches free of cost. You, as an investor, are free to ask the insurance company to switch the fund from equity to debt or vice versa. The company will act on your request. If you are someone who understands the market, this is extremely useful. However, insurance companies have god fund managers who handle such things. 

However, as for all investments, your personal goal is important. If your goal is wealth creation, then there is no better way than unit-linked insurance plans. The advantage is that it is possible to compare plans offered by different insurance companies and opt for the one which best suits you. Check the small print to see what sort of expenses are involved, premium payments, and the performance of this plan over the past. It is also necessary to investigate the kind of funds that the plan invests in and the kind of performance results these investments have given investors. This way, you can invest in the plan which you find suits your needs. The risk factor also needs to be examined before deciding to invest. 

Generally, unit-linked insurance funds are invested in the following manner - 

●      In Equity funds, the risk is higher, but returns are higher.

●      Balanced funds - in this case, the funds are divided between equity and debt markets to minimise the risk.

●      Debt funds - this investment carries a lower risk and is sometimes done at the request of the investor. Returns, however, are lower. 

However, there are 2 types of unit-linked insurance plans which must be understood. The first type pays the fund value upon the death of the investor, which is generally greater than the sum assured. The second type just pays the sum assured to the nominees. There is no added fund value. 

ULIP plan also have charges that must be considered when selecting the plan. There are Mortality Charges for the lif cover offered. And this charge depends on factors like age, sum assured etc. These charges are deducted on a monthly basis. Check to see what the size of the charge is.

 There is a fund management charge, which is essentially the charge that the company levies for management of the funds and is normally deducted before arriving at the NAV figure. 

Then there are the charges for switching the investment from debt to equity. Normally, some switching requests are free, but the company charges for each request after that.

 Partial withdrawals also attract charges. Therefore it is best to avoid such withdrawals if possible. 

The benefit of a unit-linked investment plan is that it offers a life cover and the advantage of growing your funds using the built-in investment system.