How diversified fund helps you diversify across sectors?
Just like the old saying goes, “Do not put all your eggs in one basket”. It simply means you should not concentrate all your efforts and resources in one area, because there is a high possibility of a risk of losing everything.
Diversification not only helps you save money but also puts discipline into practice where you invest regularly and spread your investments across sectors thereby not exposing your portfolio to exposed market volatility. If you are looking to balance your risks and rewards you need to diversify your assets wisely. When you diversify your portfolio well, there are key advantages where you minimise the risk of loss, preserve your capital and generate returns. All investments you invest in would not perform the way you had expected, so when you diversify the reliability on one source of income diminishes thereby helping you preserve your capital and reducing your losses.
Diversifying your capital to cushion it from volatility and risks requires a lot of patience, research and market understanding. So investing via mutual funds is the easiest way to achieve diversification and asset allocation without. It does not require you to have in-depth market expertise or knowledge, you just need to invest in mutual funds who invest in asset classes like equity, debt and gold. So when you pay a fund management fee you pay it so you don’t have to actively manage market volatility to ensure your portfolio is cushioned from all the risks. When you diversify or distribute your assets across sectors, if any macroeconomic condition arises, it would not affect your portfolio value drastically.
To understand diversification better here are a few categories you can look to diversify in
Equity mutual funds: Here there are multiple options where you can invest in one or maybe a combination of large-cap, mid-cap, small-cap or multi-cap funds, depending on your investment goals, time horizon and risk appetite.
Debt mutual funds: They come with a mix of debt securities like corporate bonds, treasury bills money market instruments etc. Compared to fixed deposits debt mutual funds offer higher liquidity and are more tax-efficient due to the indexation benefit if held for more than a 3-year-period.
Balanced mutual funds: They are also known as hybrid mutual funds which invest in equity as well as debt investment instruments and are ideal for risk-averse investors but want to reap benefits of both equity and debt investments. The balanced fund offers a good cushion of both equity and fixed income instruments.
Remember, diversifying does not mean accumulating a large portfolio, around 3-5 funds should suffice if they are well spread across different market segments and fund management styles.Diversified funds are suitable to investors who seek wealth creation for long-term goals like saving for your child’s education, marriage or are planning for their retirement.