Investing in mutual funds via the systematic investment plan (SIP) mode remains one of the popular ways for most investors.
Diversification within mutual funds is an essential strategy that can aid an investor in achieving optimal returns effectively.
Demystifying price fluctuation: SIPs remain a disciplined approach to investing as against a lump-sum investment. An investor, through SIPs, deposits a fixed amount at regular intervals, generally every month. Apart from ensuring consistency in investing, it also helps build a healthy wealth corpus while aligning with financial goals.
Price fluctuations are an unavoidable part. An investor is required to act with due diligence and understand the price action in the secondary market before investing.
Diversification as a key strategy: This relates to spreading investments across different types of asset classes to act as a cushion against market volatility. When it comes to equities, diversification relates to investing in a variety of funds that cover different market sectors, asset classes and investment styles.
Notably, as an investor, it is necessary to check the fundamentals of business entities before making any investment decision. Focus on the demand and supply generated by such entities in the respective stocks and make appropriate decisions based on this. The core idea is to beat the risk related to investing in one asset class or market segment.
The need to diversify:
Risk mitigation: Managing risk is an essential component of investing. Different funds are known to behave differently to market fluctuations. In a mix of stocks or funds in an investment portfolio, the influence of poor performance in one fund is mitigated by the positive performance of another. As an investor, it is important to remain focused on market trends and adapt to investing accordingly.
Boost in opportunities: Various types of stocks or funds in a portfolio introduce distinct opportunities and risks. Intelligent diversification helps an investor gain from various market scenarios, potentially boosting the chances of capturing positive returns, including during phases of market volatility.
Patience pays: Stock markets often witness phases of ups and downs regularly. Diversifying can aid in reducing the influence of market volatility. A few investments are likely to experience temporary dips, while others may remain more stable or even perform exceptionally better, ensuring an overall balanced portfolio. For an investor, it is all about gaining insight into factors influencing price swings to ride out any uncertain market scenario.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.