Moneycontrol
Nov 15, 2017 11:21 AM IST | Source: Moneycontrol.com

Mutual fund investing: Why you should have a diversified portfolio

Investing in various fund houses helps one to diversify their risks over each funds’ scheme.

Navneet Dubey @navneetdubey91

Mutual funds are one of the most favoured means towards achieving one’s financial goals. However, investors are often confused on whether to invest in a single scheme of one fund house or should they diversify their investments across several schemes of other fund houses as well?

“Investing in only one scheme will increase exposure risk. To mitigate this, it's best to diversify across 3-4 schemes. It's similar to the theory of hedging one's exposure to multiple investments. Having funds of different market capitalisations and investing styles would provide adequate diversification across assets, sectors, and stocks,” said Ajit Narasimhan, Category Head, Savings & Investments, BankBazaar.com.

One should plan their investments according to one’s financial goals having a specific time horizon and accordingly invest in such schemes which can help them to achieve their target wealth on time.  Here are some basic tips:

How to Initiate

Initially one can start investing in one scheme if planning for a long-term financial goal which can be retirement. However, there should be a right mix of debt, equity, and cash or cash equivalent in achieving in your overall financial portfolio as and when you proceed towards achieving it. Also, one should try and take help from a financial adviser in order to review the investment and whether the fund is helping achieve the financial goal.

How to construct a portfolio

The portfolio gets structured when one starts investing in different investment avenues. Narasimhan says the best way to construct a portfolio is to follow an asset allocation framework. Determine your individual financial situation and investment goals as the first step. Assess your level of risk tolerance and time horizon and do your asset allocation accordingly. “Remember that needs vary depending on your age, investment horizon, and capital requirements. A fresh-out-of-college professional will have very different needs compared to a professional in their 30s or their 50s. So keep all these factors in mind when you plan your portfolio,” he said.

Investing in various schemes provides an investor with the advantage of diversifying their money strategically, which can simultaneously be done by adopting different fund houses as well as fund managers skills and ability.  It also helps to diversify the risks. Also, investing in several fund houses allows an investor to choose the best fund scheme from any of the MF category. For say, certain fund houses may be good in their equity scheme while others may be good in providing debt scheme. While investing in all kind of asset mix one can create a healthy portfolio giving a maximum stable return.

How to go about asset allocation

A well-constructed portfolio has all the asset classes and managing them can become a difficult task. Investment in equity funds should be for long time horizon but as soon as the goal is achieved one needs to shift their money to a debt fund or any other debt instrument in order to secure their earning and achieve their goals successfully. Reviewing process from time to time helps you in doing proper asset allocation.

 How to minimize risk

Investing in various fund houses helps one to diversify their risks associated with each funds’ scheme where one also enjoy the best strategies they get to use from different categories of funds. If one restricts one’s investment to a single fund house then in such case one would leave the investor with sub-optimal funds only where risk can increase to a level. Therefore diversification and asset allocation is a key step and strategy to minimise the risk associated with your portfolio. Also, if one is risk-averse one may ideally go for large-cap funds or debt funds or even go with Government schemes investing.
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