Are you investing in multiple mutual funds for attractive returns? Do you have a plan to manage your mutual fund portfolio? You may consider balancing risk and return by diversifying your portfolio. However, you could struggle to manage the portfolio if you put your money in several mutual funds. Over-diversification could negatively impact the return from your portfolio.
Here are five tips to build a diversified mutual fund portfolio.
- Understand the asset allocation of your mutual fund portfolio
You may diversify your portfolio depending on your age, risk tolerance, and expected return from the investment. The rule of thumb followed in personal finance is 100 minus age, where you subtract your age from 100. It gives you an idea of the asset allocation towards equity-oriented investments.
If you are a young investor, you may consider diversifying your portfolio with greater exposure to equity-oriented schemes. You would also have to spread your investments across various types of equity schemes.
Let us consider you are a young investor aged 25 years. As per the rule of thumb (100-25=75), 75% of the portfolio invested in equity schemes. You may consider investing in large-cap funds, ELSS funds, index funds, ETFs, or even mid-cap funds to diversify the portfolio adequately. You could select the mutual fund schemes depending on your investment goals and risk appetite.
You will have to change the asset allocation as you grow older. If you are close to retirement, you could consider diversifying your portfolio with greater exposure to debt mutual funds.
- Understand your stock holdings
You could take a close look at the stock holdings of the selected equity schemes while diversifying your portfolio. You may consider avoiding similar mutual fund schemes with an identical pattern of stock holdings when you have to choose the next mutual fund for investment.
For example, investing in several equity schemes with the same stock holdings does not diversify your portfolio. You could establish a specific role for each mutual fund for better diversification of the portfolio.
- Choose different AMCs
The mutual fund managers of various AMCs have different investment styles. However, if you stick to the mutual fund schemes of a single AMC, the fund manager has the same approach to a particular situation.
It is suggested to consider investing your money in mutual fund schemes of different asset management companies or AMCs. This approach helps you to average out the performance of mutual fund schemes on a stock market correction.
You could take a look at the investment style and the track record of the fund manager, before selecting the mutual fund scheme.
- Diversify your investment across different time horizons
You may choose mutual fund schemes depending on your investment goals. For example, debt mutual funds help you to achieve short-term financial goals. However, equity schemes could perform well over the long-run.
You may consider diversifying your portfolio across mutual fund schemes with varying time horizons. It brings down the overall risk in your portfolio while helping you to achieve your financial goals.
- Diversify your portfolio across geographies
You could diversify your portfolio with an investment in international funds. It focuses on different geographical markets spreading your investment across countries. You get an opportunity to invest your money in a foreign company that runs on a unique idea.
Diversifying your portfolio across the foreign markets helps enhance return on investment. It protects your portfolio when the Indian economy is not doing well. You also get a chance of investing in stocks of a giant company with a global presence.
You may review your portfolio at least once in six months. It helps you to understand if the portfolio matches your latest investment goals and risk profile. Diversification is not a one-time job, but a constant procedure. You will have to re-balance your portfolio if you want to attain your financial goals. In a nutshell, diversification reduces the risk and enhances return in your mutual fund portfolio over the long-term.
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