Mutual Fund Portfolio Diversification

A diversified mutual fund portfolio ensures that failure in one security or an economic slump affecting one of the funds will not be damaging to your entire portfolio. Here are five things you should know how investing in different mutual fund schemes helps in minimizing risk.

Understanding allocation ofinvestments:

 Just investing in a mutual fund is not enough. One should allocate one’s investments in various options rather than limiting to one or a few. For example, the balanced distribution of assets between equity, debt or hybrid fund is important.

Knowing various stocks holding:

In order to harness the benefits of diversification evaluate parameters such as the fund’s investment style, the correlation between funds, stock overlap, etc. The objective should be to establish a specific role for each fund to play in the overall portfolio by selecting funds that are clearly different from one another, rather than similar or redundant ones.

Have funds of different AMCs:

Choosing funds from different AMCs can also help in reducing risk as the investment objective differs from company to company thereby returns may vary even though most of the stock holding remains the same between two schemes of different AMC.

Varying investment horizon:

The investment horizon of two different schemes reduces the risk in your portfolio because the investment objective differs from scheme to scheme. Assign a specific financial goal to your investments. This will ultimately help in bringing down the overall risk of the portfolio.

Analyse the benchmark of schemes:

 Every mutual fund scheme has its own benchmark for say CNX 50, BSE mid-cap, BSE 100, etc. implying that the stock holding belongs to the companies which are listed either in NSE or BSE, and accordingly, the risk varies as per the benchmark of the scheme. One should try and have different schemes in their portfolios with different benchmarks. Having schemes from different AMC with the same benchmark may not give you true diversification.