Avoid these mistakes while diversifying your MF portfolio

Diversification is the key to reduce risk. To manage large investments efficiently, proper diversification among the various asset classes is very important. The idea behind diversification is to include a variety of investments across various asset classes in such a way that the returns from these asset classes cushion each other in the different market conditions.

Investors always try to diversify the portfolio in such a way that they can meet their investment goals in a risk-efficient manner. But to optimize the risk and rewards it is important to avoid some of these mistakes while diversifying the portfolio.

Error in counting investments properly

Investors are advised to check all their investments, that is, one should list down all investments including provident funds, stock option and categorise them properly. Often investors don’t consider the regular saving modes which accounts for a major portion of an individual's investment. Not counting all the investments may lead to error in asset allocation or wrong estimation of risks and returns.

Over-diversification

It is found that many a time investors over-diversify their portfolio. Holding too many funds in a portfolio also dilutes the benefits of diversification. That is, at certain points adding funds may not be beneficial and would not reduce risks. Even over-diversification hampers the cost associated with the investment which further dilutes returns in the longer run. So investors should avoid over-diversification keeping their investment goals in mind.

Buying without conviction.

If one invests without understanding the features of an investment, then he may suffer. A person investing directly in the equity funds or buying insurance by relying on the advice of friends, colleagues are a case in point. But on the contrary, if one decides to invest only in the products which he understands well, then he may end up having a concentrated portfolio with similar types of funds. So investors are advised to have a fair view of the investment and take proper guidance from the experts if they lack the expertise to diversify their portfolio.

Allocation Drift

Many a time investors may lose track of their investment objective while diversifying. That is, while diversifying and investing in various asset classes, it is necessary to maintain a balance in the asset allocation which is a very important aspect. So investors should keep a track of asset allocation periodically and should rebalance it as and when needed to achieve their ultimate investment goal.

By avoiding the above mistakes, one can earn a decent return with proper risk exposure and achieve their investment goal in a predetermined period of time.