Achieving Diversification through Mutual Funds

Achieving Diversification through Mutual Funds

10 Jul 2019

In financial parlance, Diversification is the process of allocating capital in a way that reduces the exposure to any one particular asset or risk. A common path towards diversification is to reduce risks or volatility by investing in a variety of assets. A similar concept can also be applied when you invest in Mutual Funds. Diversifying helps you to achieve higher yield returns on an average and reduces the risks in mutual fund investments. Diversification is one of the many advantages of investing in mutual funds and it can help an investor in two ways: instant diversification and portfolio diversification in multiple fund categories.

Achieving diversification through mutual funds may be intimidating for new investors but it is in reality a very simple process. Initially, a portfolio is formed by an investor with the consideration of several different investment instruments. Later, the risk element of various investment schemes is sorted. You can minimize the industry-specific risks by considering diversification across different industries. A Fund Manager is the one who decides when and where to invest. It is to be noted that you cannot completely avert the risks through the mode of diversification, however, the impact of the loss on the investor’s portfolio gets minimized.

Diversification allows investors to gain knowledge about different investment strategies. It opens huge avenues for international investments, because investors look beyond the national borders while scouting for suitable investment options. Whenever you invest in the international markets, it is as important as investing domestically. Thus, your portfolio remains secure even if there is an economic recession in your home country and vice-versa.

Diversification ensures a smooth performance of the portfolio and gives you the confidence of achieving consistent returns on your investments. Start investing today and lower the overall risk in your portfolio.

Advantages of Diversification:-

  • Reduces the impact of market volatility
  • Reduces the time spent in monitoring the portfolio
  • Helps secure benefits of different investment instruments
  • Helps avail of the benefits of compounding of interest
  • Help keep the capital safe or assists preservation of your capital
  • Lets you shuffle amongst investments

Disadvantages of Diversification:-

  • Diversification can limit your downside by averaging out risk and volatility across a group of investments, however, on the flip side, it will also cap your gains on the upside
  • It's also possible for diversification to increase your risks if it leads you to purchase investments that are risky or which you don't understand very well
  • A highly diversified portfolio can also be more time-consuming to manage than a less-diversified portfolio because you'll have more investments to follow and track, plus more layers of diversification to make sure you're adhering to
  • Transaction costs could also be higher if such diversification requires you to micro-manage and trade more frequently
  • During the 2008-2009 financial crisis, for instance, virtually every listed stock fell substantially. Diversification which can reduce risk, volatility and heartburn better than non-diversification, doesn't always work as hoped, especially under such exceptional unfavourable circumstances.

Mutual Funds are a great tool for diversification. Having said that, you might also be caught up in a common mistake - many investors think that putting money into different mutual funds is akin to achieving enough diversification, but “different” is not always the same thing as “diverse”. Therefore, it is better to do an in-depth research and analysis before putting your hard-earned money into different sectors in mutual funds and take informed decisions instead of randomly deploying money. You can always hire the services of a professional advisor if needed.

Founded in 2005 by new–age entrepreneur Abhishek Bansal, the Abans Group has evolved into a globally diversified conglomerate, providing expertise in Broking Services, Non-Banking Financial Dealings, Financial Services, Agri-Commodity Services, Warehousing, Realty & Infrastructure, Gold Dore Refinery & Manufacturing, Trading in Metal Products, Pharmaceuticals, Software Development & Wealth Management. The Group is a comprehensive financial and non-financial services and solutions provider, aiming to provide end-to-end solutions to its clients.