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Tips to Build a Diversified Mutual Fund Portfolio

  •  4 min read
  • 0•
  • 22 Dec 2023
Tips to Build a Diversified Mutual Fund Portfolio

Follow these steps to build a diversified mutual fund portfolio:

Know Your Financial Goals

Before building your mutual fund portfolio, you must define your investment goals. Are you investing for an emergency corpus, buying a house, or saving for your child’s education? Different goals may require different investment strategies.

While debt funds are better suited for short and medium-term goals like emergency corpus or buying a house, equity funds are a prudent choice for long-term goals like your child’s education and retirement. Understanding them will help you choose the right mix of mutual funds to achieve your financial goals.

Understand Your Risk Appetite

Assessing your risk appetite is a crucial step in creating a diversified portfolio. Some investors can handle higher levels of risk, while others prefer a more conservative approach. If you’ve a high-risk tolerance, you can opt for equity funds that are more volatile in nature. On the other hand, if you have a low-risk tolerance, you can choose debt funds that are relatively less risky.

A deep understanding of your risk appetite allows you to select mutual funds that align with your comfort level and financial situation.

Mix Investment Styles

When building a diversified mutual fund portfolio, one of the key strategies to consider is the selection of mutual funds from different fund houses that offer a mix of investment styles. Fund houses have a variety of mutual funds under their management, each with its own unique investment style and approach.

Many fund houses offer mutual funds that follow either a growth or value investment style. Growth funds focus on investing in companies with high potential for earnings growth, while value funds target undervalued stocks with the expectation of increasing prices.

Also, fund houses offer both actively managed mutual funds and passive funds, such as index funds or exchange-traded funds (ETFs). Active funds are managed by professional portfolio managers who make investment decisions, while passive funds aim to mimic the market index's performance. Mixing both types of funds in your portfolio provides the benefits of active management’s potential outperformance and passive investing’s lower fees.

Opt for Geographical Diversification

Global markets can perform differently due to many factors, and the impact of geopolitical events on investments in various regions can be substantial. These events can range from political tensions and trade disputes to economic crises and unforeseen natural disasters. As an investor, it’s imperative to recognize the potential risks associated with regional economic and political instability.

To bring down the risk in your investment portfolio and safeguard your financial future, one of the most effective strategies is to consider investing in mutual funds that provide exposure to international markets. This approach allows you to diversify your holdings beyond your home country and benefit from worldwide growth opportunities.

Monitor and Rebalance Your Portfolio

Building a diversified mutual fund portfolio is not a one-time task. You should regularly review your investments and make sure they are in tune with your goals and risk tolerance. Rebalancing involves buying and selling funds to maintain the desired asset allocation.

As some assets may perform better or worse than others, rebalancing helps you stay on track and manage risk effectively.

Here are the benefits of building a diversified mutual fund portfolio:

  • Diversified portfolios tend to exhibit more stable and consistent returns over time, minimizing volatility.
  • A diversified portfolio can capture opportunities in different sectors, industries, and regions, potentially leading to better overall performance.
  • Diversification allows for risk-adjusted returns, as you can tailor your portfolio to match your risk tolerance and financial goals.
  • Diversified portfolios are adaptable and can be rebalanced to align with your changing financial goals or market conditions.
  • Over the long term, diversification can help grow and preserve wealth by reducing the risk of significant losses.

In Conclusion

Building a diversified mutual fund portfolio is fundamental to achieving your long-term financial goals while managing risk. Remember to keep an eye on costs and regularly rebalance your investments to ensure your portfolio remains aligned with your goals.

Kotak Securities allows you to invest in various mutual funds across industry verticals that can help you build a diversified portfolio. To get started, click here.

FAQs

Diversification involves distributing your investments across various funds to limit your exposure to any single asset type. Its purpose is to mitigate the long-term volatility of your portfolio.

Select mutual funds according to your investment objectives. If you have a short-term investment horizon, opt for debt funds. For long-term investments, consider equity funds. Nevertheless, your scheme selection should be guided by your individual risk tolerance.

For beginners, it is advisable to begin with diversified equity mutual funds as they provide exposure to a broad portfolio of 50-100 stocks, which typically exhibit lower volatility. In contrast, focused funds offer exposure to a maximum of 30 stocks with higher volatility.

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