How an Investor can Diversify Investments Using Mutual Funds?

Diversification is a common term which is always used with respect to investment. You can understand the concept of diversification with an example of a cricket team where each player has different skill sets and collaboration of such skills helps them in achieving team victory. Similar to this example, diversification in mutual funds is an innovative strategy to weaken risks and allowing portfolio to perform better with secure investments. In fact, investment in mutual funds plays a vital role in diversifying your portfolio by lowering risk factor associated with unplanned investment.

Why Diversification with Mutual Fund is Needed?

Although, mutual funds investments are immune to minimum market related risk but still, there are chances of investment goals disruption Diversification is an ideal method to lower overall investment risk and investor can easily diversify mutual funds as well as asset allocations even without deep insight of each asset class.

Types of Available Diversification Option

By using mutual funds schemes, investors can freely spread his or her risks by investing in different asset classes like debt, equity and gold in order to protect portfolio value from sudden change due to macroeconomic conditions.

Equity Mutual Funds: Equity mutual funds make investment in the equity market depending on an individual risk appetite and investment goal. As an investor, you can invest in small-cap, mid-cap, large-cap and even multi-cap funds to satisfy your hunger for risk and achieving your desirable investment goal. You can seek advice of an expert financial planner to analyze the portfolio of the equity fund and choose the best available option for investment in equity mutual funds.

Read what are diversified equity mutual funds

Debt Mutual Funds: Debt mutual funds invests in a mix of debt securities like treasury bills, money market instruments and corporate bonds. They offer higher liquidity than traditional fixed deposits schemes and also yield higher returns for a prescribed time interval. For a salaried person and working professionals, debt mutual funds offers amazing tax benefits especially when the holding period for a requisite policy have tenure of more than 3 years with its compounding power.

Did you know what are Debt Mutual Funds in India and how they work

Balanced mutual funds: Balanced mutual funds also known as hybrid mutual funds are combo pack of equity and debt mutual funds. Hybrid mutual funds emerge as a perfect option for a first time investor as it delivers the cushion against financial market and can also be simply diversified.

See the top performing Balanced Funds

How Many Funds Ensures Diversification?

Investors usually find it difficult to decide how much investment using mutual fund diversification strategy will be sufficient to reach their financial objective. Ideally, the number of funds for investments depends upon investment objective, principal amount and risk profile of an investor. For an investor, it is advisable to not start investing in more than 3-5 funds in a portfolio to meet fund management requirement and spreading risk profiles. Also, one should not start investing in higher numbers of mutual funds initially because strategy many times impairs investor’s capability.

Diversification of mutual funds is not a factor concerning about numbers but it is a strategy of wise investment accomplished when a person invest in range or companies, assets classes and sectors by using mutual funds as an investing instruments with patience. So, consult your financial advisor right now and start planning for your future by diversifying investment using mutual fund schemes.