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.