Diversifying MF investments

There are different types of mutual fund schemes available in the market and many investors are at a loss to decide which MF scheme to buy from the plethora of schemes. The difference in MF schemes primarily relates to their objectives and levels of risks involved in the underlying asset classes in which these schemes invest. 

On the one hand, an equity mutual fund invests a minimum of 65% in equities, on the other hand, a debt mutual fund majorly invests in debt instruments, while a gold exchange-traded fund (ETF) invests in gold. Since these different asset classes have varying levels of risk and provide different kinds of returns, the investor can choose to invest in any of these mutual funds depending on his investment objectives, return expectations, risk appetite, investment horizon, etc.

However, it is always a good idea to diversify one’s investments into various asset classes in order to enhance returns and mitigate risks associated with investment in a single asset class. Since investing the entire money in a single fund is a risky proposition like putting all the eggs in one basket, it is always better to allocate the money for investment in 3-4 funds having diverse investment styles and market capitalisations so as to derive the benefits of diversification across various asset classes, sectors and stocks. The different types of mutual funds can thus help achieve the objective of diversifying one’s portfolio and make the portfolio well-balanced in terms of risk-return parameters.