How to diversify your portfolio?

Mutual funds have gained too much attraction in the last couple of years. The key reasons behind this are the returns provided by these funds and the increasing awareness about the same. In the current scenario, it has become an obvious choice for investors seeking to meet their long-term investment goals. To increase their benefits from the mutual funds its imperative that investors create a neatly diversified portfolio. But how to build a diversified portfolio? Let's explore some of the aspects which can help you build a diversified portfolio.

Horizontal Diversification

Horizontal diversification is the diversification within the asset classes. The main motive behind this is to diversify the risk associated with the various asset classes. It involves diversification within the asset classes that is equity funds are further divided into large-cap, mid-cap, small-cap and multi-cap funds. The diversification within the asset classes reduce the risk as well as absorbs the fluctuations with a particular type of the securities in a particular time stamp.

Vertical Diversification

It is nothing but diversification across various asset classes. That is, if an investor holds equity funds then he should also opt for debt funds and vice versa. The diversification across the asset classes cushion the returns from them. That is, equity funds are more aggressive avenues where the risk component is high, if these classes underperform then the losses from them can be capped with the other asset classes. With vertical diversification one can safeguard his investment against volatility and can get maximum returns from the investment.

Geographical diversification

One more way to diversify the portfolio is geographical diversification. This involves diversification across various markets. This diversification can be very useful to reduce risks involved in the various market condition in the various financial markets.

Fund manager diversification

Fund manager diversification is also important. Every fund manager and fund house have their unique qualities in handling market conditions and the portfolio accordingly, so investors should diversify among the fund mangers also to achieve their investment goal. Many a times, investment style of the fund manager does not suit the investor's expectation, so in such cases rather than changing fund houses frequently, its better to choose a right fund manager.

Investment style diversification

Every investor has his unique investment goal and preferred unique investment style for the same. This investment style is nothing but a reflector of his risk appetite, time horizon and financial goal. So investors are advised to mix investment styles among the funds to diversify the portfolio to reduce the risk and enlarge the returns. That is, investors should invest across various investment styles like Growth where fund managers usually invest aggressively into the Growth stock, Value investment style where the undervalued stocks are been picked by the funds for longer term investment, Dividend style where investor can get regular income from the investment. This type of diversification provides investor an opportunity to invest in the various investment approaches followed by the fund managers.

In this way, one can easily diversify their mutual fund portfolio. The ultimate aim behind diversification is capping losses to enlarge and safeguard the returns. So one can use any of the above mentioned ways to diversify the fund portfolio.