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To diversify your mutual fund portfolio, spread your money across different types like large-cap, mid-cap, debt, and international funds.
Avoid similar funds, limit sector funds and match investments to your risk level.
A mutual fund portfolio is a collection of investments like stocks, bonds, or other assets. Many people choose mutual funds to get easy access to a mix of investments without selecting individual stocks. But just having several funds doesn’t always mean your money is well-diversified.
Real diversification lowers risk and gives more stable returns by spreading your money across different types of investments, industries, and strategies. So, how do you build a mutual fund portfolio that’s truly diversified? Let’s understand it step by step.
Don’t Overcrowd Your Portfolio
Many investors believe that more mutual funds mean better diversification. But holding too many funds, especially those with overlapping holdings, can lead to portfolio clutter. Experts recommend limiting your portfolio to about 5–7 mutual funds across different categories. This ensures meaningful exposure without duplication.
Mix Fund Categories Wisely
A well-balanced portfolio includes a mix of large-cap, mid-cap, and small-cap equity funds, along with debt or hybrid funds, depending on how much risk you can handle. For example, if you are someone with medium risk tolerance, you could invest 40 per cent in large-cap funds, 20 per cent in mid- or small-cap funds, 30 per cent in debt funds, and 10 per cent in international funds.
Include Sector and Thematic Funds Cautiously
Sector and thematic funds can give higher returns during certain market conditions, but they come with more risk. If you decide to invest in them, keep the amount small—around 5 per cent to 10 per cent of your total portfolio—and balance them with safer, diversified equity funds.
Use SIPs to Handle Volatility
Systematic Investment Plans (SIPs) help average out the cost over time, making your investments less sensitive to short-term market fluctuations. During volatile periods, continue SIPs rather than halting them.
Add International Exposure
Diversifying across countries is also important. Adding an international fund to your portfolio can protect you from risks in the Indian market and give you a chance to benefit from global growth.
Rebalance Periodically
When markets go up or down, your investment mix can change. Rebalancing your portfolio once or twice a year helps bring it back in line with your original plan and risk level.
Align Diversification With Time Horizon
Long-term goals (like retirement) can handle more equity exposure, while short-term goals should be backed by debt or hybrid funds to minimise volatility.
Real diversification isn’t just about owning many funds—it’s about smartly spreading your money across different types of funds, assets, and regions. With the right mix and regular check-ins, your mutual fund portfolio can give steady returns while keeping risks under control.
A team of writers and reporters decodes vast terms of personal finance and making money matters simpler for you. From latest initial public offerings (IPOs) in the market to best investment options, we cover al…Read More
A team of writers and reporters decodes vast terms of personal finance and making money matters simpler for you. From latest initial public offerings (IPOs) in the market to best investment options, we cover al… Read More
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