Investment Diversification: While investing in mutual funds, it is very important to take care of diversification to manage portfolio risk. However, diversification does not mean investing in multiple instruments without thinking. Investing in too many products and schemes can lead to over-diversification. Because of this, it can be difficult for the investor to manage all the investments. Experts say that over-diversification also reduces the ability of a portfolio to generate returns.
In today’s time, having a good portfolio is very important if you want good returns through investment. The advantage of diversification is that it largely reduces the risk in your investment. Apart from this, it also increases your returns in the long run. The method of diversification in your portfolio depends on your risk appetite or your age. Also what is the return you are expecting. Keeping these things in mind the portfolio should be made. Therefore, it can be said that there can be differences in their portfolios depending on the needs and thinking of different investors. Here we have explained how to build a better diversified mutual fund portfolio.
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While allocating funds, it is important to maintain a balance between different schemes.
Therefore, how an investor’s portfolio will be, depends on his age and risk appetite. For example, investments in an asset class may be more or less depending on the age of the investor, but even within that asset class, the fund should be adequately allocated across different schemes. Suppose a young investor has invested 80 percent of his portfolio in equity schemes and 20 percent in debt. Instead of allocating 80 per cent of the equity scheme funds in a single fund, it should be allocated in small, mid and large cap funds. The decision of how much fund to allocate should be decided according to the expected return. However, with the change in the age and risk appetite of the investor, the fund allocation ratio should also be changed gradually.
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Diversification in different time horizons
Industry experts say that along with diversification across different schemes, an investor should also consider different time horizons for better diversification. This is because the level of risk usually changes in the short and long term, hence, when investing in two schemes with different time horizons, thus the risk can be mitigated in a better way.
Variation in Stock Holdings
View the stock holdings of mutual fund schemes while bringing diversification to your portfolio. Experts say that while doing this, you can spot two similar schemes in your stock holding pattern and avoid them. Do note that holding the same stock in multiple schemes can spoil your diversification plan. This is because these schemes will perform in the same way whenever there is volatility in the market.
(Article: Priyadarshini Majhi)
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