MYTH-19. DIVERSIFICATION OF MUTUAL FUNDS GUARDS AGAINST VOLATILITY
1. Ground reality
·
Buying too many
similar mutual funds does not really diversify your investments.
·
Diversification
means having a mix of schemes in your portfolio differentiated by their fund
structure (diversified, large cap, small cap, mid cap, sectoral), investment
style (growth, value), or risk profile (high, medium or low risk), optimized to
your risk-return profile.
·
Most diversified
equity funds follow roughly the same pattern of investment with respect to both
stock and sectoral allocation, as they have to invest mainly within the same benchmark index.
· Too many funds will only ‘diworsify’ your portfolio.
2. What to do?
·
Look up the
fund’s investment mandate before putting in money, and avoid duplication.
·
A
well-diversified portfolio can be a mix of large-cap, mid-cap and multi-cap
schemes.
·
Add a few
sectoral funds if you want a focused exposure to a particular sector or theme.
·
Do a lot more
research of the fund’s category and its index for this.
·
Don’t invest in
more than 6-8 equity funds, because monitoring them will be a challenge.
·
Diversification
could also be achieved by investing one’s funds in a mix of equity, debt, gold,
money market and real estate funds.