A downfall in the stock market perhaps serves as a wakeup call for many investors, especially for those who invest in one asset class or one type of fund like small, mid or large-cap mutual funds. This is when they realize the merits of a diversified investment portfolio.
Diversification of funds is recommended as it reduces the investment risk and likely to offer an adjusted return. In addition, it confers the taste of other asset classes in different market conditions. In short, the overall idea is to put your stocks in different baskets instead of one to avoid the exposure to higher risks.
Now, let us check out the best and most effective ways to diversify the mutual fund investment.
Spread within the asset class: If you decide to invest in equity mutual fund scheme to meet a long-term financial goal and invest all your money in a small cap, mid cap or large-cap fund, then this means nothing but you’re exposed to a higher risk. Instead, invest in a multi-cap equity fund which embodies large-cap funds, small-cap funds, and mid-cap funds. Or, distribute the investment across different schemes of equity so that if one scheme lets you down, the other will give you a reason to smile.
Diversify even more: Like we just said that distributing the wealth within different asset classes is the best way to diversify a portfolio, similarly, outspread your investment across varied asset classes to widen the horizon even more. For instance, invest in safer avenues like bank deposit or debt mutual fund if you have to achieve short-term financial goals and park the rest of the investment in equity funds for your long-term goals. This diversification will protect you from a sudden volatility in the stock market and help you achieve a predictable return from bank deposit and debt mutual fund for short-term goals.
Geographical diversification: Keep a check on the performance of the funds across the globe to make a calculative investment. For instance, if the US market is doing well, then invest the major percentage of your corpus in the US-focused funds or invest in the funds of other countries if they are on the upswing. This will help you to get a better return, especially when the Indian fund market wanes.
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