If you are a mutual fund investor, then striking a balance on the kind of mutual funds to invest in is very important.
Wealth managers suggest that investors should diversify their mutual fund portfolios by investing in different asset classes such as equity, fixed income, and gold. This strategy helps them achieve their financial goals effectively. To meet these goals, investors need to have a diversified portfolio that includes more than one scheme.
Investors diversify their mutual fund portfolios because they have different life goals and objectives that need to be achieved over various time periods. This requires investing in different asset classes such as equity, fixed income, and gold, or a combination of them. Therefore, portfolios need to be diversified across asset classes and different schemes.
Investors have more than one scheme in their portfolios because each scheme serves a different purpose.
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For instance, to address emergency needs, investors may invest in a liquid or ultra-short-term fund. For future expenses like children’s education or a planned holiday, an equity savings fund may be suitable.
Target maturity funds can be used to save money for long-term goals, while gold funds act as a hedge against inflation. On the equity side, small-cap funds can generate alpha and help achieve goals that are 10 years away, while ELSS funds provide tax-saving benefits.
Passive index funds can be used to allocate to large-cap stocks. Investors looking for specific themes or international exposure can invest in technology funds, thematic funds, or geographically diversified funds.
Financial planners believe that it is challenging to determine the optimum number of schemes in an investor’s portfolio, as mutual funds are used for both long-term and short-term goals.
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However, they advise investors to limit themselves to 10 schemes for easier monitoring and management. To reduce the number of schemes in a portfolio, investors can check for overlaps with similar schemes. If there is a high overlap, adding another fund may not provide any additional diversification or returns.
