Nowadays along with stability and growth, diversification has become an important aspect to consider while building a resilient portfolio. The emerging equity fund is one of the powerful investment avenues and also a midcap fund, allowing investors to capture maximum market growth while achieving a perfect blend of diversification.
Let us have a clear understanding of the emerging equity funds and how they can help in diversifying your portfolio and more. Read along to get further insights about the same.
Understanding Emerging Equity Funds
Emerging equity funds are equity mutual fund schemes that primarily invest in company stocks of developing countries. In other words, it invests in companies in developing countries or emerging markets. Some of the largest emerging markets in the world include India, China, Russia, and Brazil.
These markets are often characterised by rapid economic growth and development, providing unique investment opportunities and high returns. By investing in these funds, you can gain exposure to multiple industries across various sectors, allowing you to capture the highest market growth.
Benefits of Emerging Equity Funds for Portfolio Diversification
Here are some of the core benefits of investing in emerging equity fund for portfolio diversification:
- Long-term Investment Focus: Invests in high-conviction companies with a long-term growth perspective, avoiding short-term trends and herd behaviour.
- Core Portfolio Component: This fund could form a key part of the “core” equity portfolio for investors looking for sustainable growth.
- Bottom-up Stock Selection: These funds have a primary focus on large and mid-cap companies, carefully selecting the best among emerging businesses.
- Future Sector Leaders: The main objectives of these schemes are to identify companies with the potential to become leaders in their respective industries.
- Hedging Against Inflation: Emerging markets, i.e., developing countries are often rich in resources and are some of the major producers of metals, oil, and other commodities. Therefore, investing in these markets allows you to hedge against inflation, particularly when the commodity price rises.
Tips To Diversify Your Investment Portfolio with Emerging Equity Funds
Before investing in emerging market funds in India, it is important to evaluate several key aspects to make an informed decision:
- Before you start investing in an emerging equity fund, it is important to understand the nature of the emerging market. Emerging markets are characterised by several aspects such as rapid economic growth and development, etc. Therefore, consider evaluating these factors carefully to make informed decisions.
- Though the emerging market offers you significant growth potential, it also comes with various kinds of risks such as inflation risk, liquidity risk, political risk, institutional risk, etc. Hence, it is crucial to assess these risks carefully before investing.
- Selecting a fund with a lower expense ratio can help you to reduce costs and maximise your returns over time. However, be sure to compare expense ratios across funds to make a cost-effective choice.
- Emerging markets can be volatile, and short-term fluctuations are quite common. Therefore, consider investing for a long-term investment horizon, as a longer-term allows you to ride out these fluctuations and benefit from the growth potential of emerging economies over time.
The Bottom Line
Having an emerging equity fund in your portfolio is one of the most effective ways to capture market growth along with diversification across industries, sectors, and national boundaries. However, it is essential to approach emerging equity funds with a well-informed strategy and a clear understanding of the various risks associated with market volatility and economic fluctuations. Moreover, if you feel uncertain, consulting a financial planner or investment advisor can help you make more informed decisions.
Frequently Asked Questions
How to diversify your portfolio using emerging equity funds?
You can diversify your portfolio by simply adding an emerging equity fund to your portfolio, but before adding it to your portfolio consider the following steps:
- Understand emerging market funds
- Consider checking out the risk factors
- Evaluate fund performance and costs
- Adopt a long-term investment perspective
How much returns can we expect from an emerging equity fund?
An emerging equity fund can generate a significant amount of return over time. For example, Kotak Emerging Equity Fund Direct-Growth has generated 28.39 per cent CAGR over the last 5 years and 22.03 per cent CAGR since inception.
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