Document
Index

Mutual Fund Diversification

Updated on: Jan 13th, 2022

|

2 min read

Breaking a bigger problem (risk) into a minimal or manageable one – this is what diversififying does to an investment portfolio. Mutual fund diversification, also known as asset allocation, is a strategy that helps to manage unsystematic risks in investment. The agenda of diversifying is to lower investors’ risks. Let us see how this tactic helps in mitigating potential capital loss.

Mutual Fund Diversification 

The ultimate aim of diversifying is reduce risks in mutual fund investments. This helps achieve higher yield returns on average. Thus, it cushions the negative impact of the adverse performance of any one (or a few) security in the overall portfolio. The practical application of diversification to a first time investor may seem overwhelming and even intimidating. However, the concept of this theory is quite simple. Let us elucidate it in three steps as given below.

Step-by-step guide to diversification

i. An investor must first build a portfolio with the inclusion of various different investment instruments. This could range from options like stocks and bonds, to cash mutual funds and so on.

ii. The second step o diversify involves sorting the risk element of various investment schemes. You can do this by picking securities with diverse risk levels.

This way, even if you face loss in one, the gains from the others can compensate for the that.

iii. Diversification can also be across different industries. It is important to take into consideration and pick securities according to industries in order to minimize the industry-specific risks. iv. Success of a diversified portfolio depends on the skills of the fund manager. It is the manager who decides when and where to invest.

What it means to diversify investment portfolio

There are certain investment instruments that tend to perform better than their counterparts. This depends factors like the prevailing interest rates, the market conditions and the performance of the currency market. It is important to note that diversification does not completely avert the risks. Rather, it can only minimize the impact of the loss on the investing portfolio.

Investing in mutual funds that invest across a broad range of assets is one way to spread the risks. For instance, exchange-traded funds help reduce exposure to your portfolio of investments that form a certain index.

Why diversification is important to investors

It is clear that diversification forms one of the most important principles in investing. If one seeks to grow their portfolio it is vital to diversify their investment.

  • Diversifying, without any doubt, protects the various asset classes in your investment kitty and helps it grow.
  • As an investor, you get to explore more investment choices as you move from just one form to another. Nothing but dabbling and experimenting like this can educate investors and make them savvier in investing.
  • Diversification allows investors to get familiar with different investment strategies.  This way one gets to learn multiple approaches to investing from value-focused to growth-focused investing.
  • The most important aspect of diversification is that it lowers the overall risk of investing in an investor’s portfolio.
  • Many are biased towards the domestic market and tend to invest only within the confines of the country. Diversification makes an investor look beyond the national border, when seeking investment options. So, it opens a huge avenue for international investment.
  • Investment in international market is as important as investing in the home country. Therefore, it minimizes the portfolio risks during periods of economic recessions in the domestic economy and vice versa.

Thus, diversification helps investors achieve consistent returns on investments and ensures a smoother performance of the portfolio. Investing with ClearTax Save can help you gain a diversified portfolio in a hassle-free manner. We have handpicked top-performing funds that suit diverse investment needs for your convenience. Start investing.  

inline CTA
Invest in Direct Mutual Funds
Save taxes upto Rs 46,800, 0% commission
Can't get yourself started on taxes?
Get a Cleartax expert to handle all your tax filing start-to-finish

Clear offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. Clear serves 1.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India.

Efiling Income Tax Returns(ITR) is made easy with Clear platform. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.

CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in getting your business registered for Goods & Services Tax Law.

Save taxes with Clear by investing in tax saving mutual funds (ELSS) online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone.

Cleartax is a product by Defmacro Software Pvt. Ltd.

Company PolicyTerms of use

ISO

ISO 27001

Data Center

SSL

SSL Certified Site

128-bit encryption