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Diversification of Portfolio with Mutual Funds

An important aspect to take into consideration while building a financial portfolio is diversification. It helps in mitigating risks while allowing you to yield high returns simultaneously. In order to achieve the objective of diversification, you may allocate assets across various categories.

An ideal method of diversifying your portfolio is by investing in mutual funds. Such an investment instrument offers numerous options of asset classes such as equity, debt, balanced funds, and gold saving funds. This helps you spread risks, thereby minimizing potential losses in case the markets were to crash.

You may target the below-mentioned mutual funds to diversify your investments.

  1. Equity funds

Equity funds are best-suited if you love to take a risk. There are numerous options that you may choose from, based on your investment goals such as small cap, mid cap, large cap, and multi-cap funds. Remember, a more diversified fund indicates a lower negative impact of an individual stock’s adverse price movement in case of market uncertainties.

  1. Debt funds

A debt mutual fund involves investment in debt securities such as treasury bills, post office savings, bank fixed deposits, corporate bonds, and money market instruments, among others. Debt funds are the best option if you are a risk-averse investor. You may choose to invest in debt funds, and enjoy the benefit of tax efficiency, capital appreciation, and stable income.

  1. Balanced funds

Balanced funds offer a mix of equity investments as well as debt funds. Such a type of fund is ideal if you do not wish to take on equity-related risks, but wish to earn higher returns. Investing in debt funds along with equity offers a cushion to even out risks.

  1. Gold saving funds

Another popular vehicle for mutual fund investments is gold. Due to its exponential performance over the last years, you may look at gold funds as an investment asset. Gold acts as a hedge against inflation and is known to maintain its value in the long run.

You may consider other options too, such as mutual fund SIP, bonds, cash, commodities, and other precious metals. Diversifying your investments opens up the potential for rewards along with a broad exposure to various stocks.

Diversifying your portfolio through the right mix

Many investors are often faced with the dilemma of how to diversify their portfolio. In order to resolve this dilemma, you may consider choosing the right number of funds based on your risk profile and your financial goals.

Diversification ensures that your mutual fund investments are well-shielded from a sudden volatility in the stock market. You may, therefore, invest across varied sectors, asset classes, and companies, thereby diversifying your portfolio effectively.

About Vikas Agarwal

Vikas Agarwal is an IIT-Varanasi graduate in Chemical Engineering. He is the Founder and CEO of Finaacle.com - an investment advisory website. He is a Business Development Professional but a Value Investor at heart. He writes articles on Finaacle, which focus on simplifying the art of investing and the causes of human misjudgment when it comes to investing. He also shares his experiences as an investor and lessons from some of the greatest investors of all time.

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