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Wednesday, September 5, 2018

IndianIPOBlog MF: Too many schemes in Mutual Funds do not necessarily mean diversification

Diversification: The word that most investing schools and experts would tell you for mitigating market risks. However, it has to be understood that diversification in mutual funds is different from that in stocks

In general, diversifying your portfolio is always a good idea. This does not however mean, that there is need to add many funds into the portfolio. One large-cap fund is sufficient in any portfolio, and even an index-tracking fund would be an added buffer. However, abruptly selected funds will keep your portfolio as a high-risk portfolio with sporadically selected funds. 

Thematic funds for instance, need care and understanding of time of entry and exit along with active tracking. Most investors do not have either of these and still choose to opt for thematic funds consequently resulting in meagre returns

Many investors have this notion in mind that if they own all types of mutual funds in their portfolio, then diversification is achieved and risk will be mitigated. What happens in these types of portfolios is that effectively your capital is so dispersed that any significantly market beating returns in one or two good funds are offset by muted returns in other funds in your basket, and the end result is that you do not get effective return on the overall portfolio

Although the composition of your portfolio would depend on a lot of factors like risk appetite, aggression as well as your age, diversification needs to be smart and dynamic when it comes to mutual funds and not necessarily mean owning many funds

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