Investing is the right approach to putting your hard-earned money to good use. It is the means to make your money work for you and increase returns. You should know how to manage the risks to benefit from them. For this, you must implement the practical approach of diversification. In this technique, you spread your investments for divided risk.
It is a must to implement this while structuring your Mutual Fund portfolio. The fundamental reason is its exposure to market fluctuations. Most assets classed in Mutual Funds offer returns based on the highs and lows that the market faces. Hence, you must balance your risks to gain stable returns despite the volatility. Here is how to go about achieving diversification:
Consider financial goals
Aiming for long-term gains is the most common advice while investing in Mutual Funds. While it is the right approach for long-term gains, it is not a standard rule. Some schemes perform better in the short term and yield higher returns. Hence, they should not get ignored. For a well-balanced portfolio, mix the short-term assets with sustainable schemes. Assess your financial goals to create the correct ratio.
Devise a structure
It is up to your discretion on how you create an investment plan. You may either stick to one scheme or create an elaborate MF portfolio. The wise approach is to go for the latter for diversification. To achieve this, you should consider the practical design of 'core and satellite'. Here, the core funds form the largest part of the portfolio, while the satellite represents the smaller portion with low-risk tolerance schemes.
Assess stock holdings
Analysing the quality and number of stocks you own is a good practice. It lets you adjust to achieve diversification. Ideally, you should have not more than two or more similar schemes. The reason being the identical effects they face during market volatility. The opposite approach in Investment Banking lets you avoid overlapping.
Let go smartly
Diversification is a continuous process that keeps changing with market trends. You cannot get done with it through one-time Mutual Fund portfolio management. The ideal approach is to review and rebalance your holdings. If a share is performing well, add more. Alternatively, remove the long-term underperforming assets that bring your portfolio down. Using this method, you cut back on losses and focus on lucrative schemes.
Study underlying benchmarks
Choosing a bunch of schemes and spreading them across your portfolio is not the aim of diversification. Instead, it is performance-based. That is how you make the most out of balancing risks. Hence, look beyond the asset classes when picking shares for diversification. Study their underlying benchmarks like BSE 100, CNX 50, NIFTY, etc. This way, you avoid investing in schemes with similar performance and earn varied returns.