If you are an aggressive investor, there is a good chance of your portfolio incurring losses when the markets are low. This is why most mutual fund advisors insist investors on diversifying their investment portfolios depending on their risk appetite. A risk appetite is something that investors should take into consideration while investing in mutual funds. That’s because mutual fund investments are constantly exposed to the market’s volatile nature. A well-diversified portfolio not only balances the risk of an investor’s mutual fund portfolio but also helps beat market volatility. If you did not pay much attention to diversification when you started investing, do not worry. You can still diversify your mutual fund portfolio and help your portfolio navigate through volatile markets.

It is never a good idea to put all your eggs in one basket when it comes to equity funds. Here’s an example to help you understand why you should not place all your bets on just one asset class. Suppose you invested in equity mutual funds. Your entire mutual fund portfolio consists of equity funds. You are a young investor who is following the aggressive investment strategy and hence put all your finances in equity funds. Now historically equity funds may have offered decent capital appreciation, but they are meant for the long run. You cannot expect equity funds to perform over the short term. In fact, equity funds are highly volatile in nature when it comes to short-term investments. Suppose an ongoing pandemic affects the global markets, leaving equity funds in turmoil. This will cause a direct effect on your portfolio and there is a good chance of your investment portfolio incurring losses. That’s because you put all your money in one asset class and expected it to give you returns over the short term. But in reality, equity funds need their own time and space to show their true potential. If you had diversified your mutual fund portfolio by investing in various asset classes, then the other performing markets may have balanced the losses. That’s because it is less likely for all the markets to underperform at the same time in tandem.

What you can do in the above scenario is that invest in multiple equity funds. For example, there are blue-chip funds (also known as large-cap funds) that invest in high-rated company stocks. Then you could allot a portion of your finances to debt funds. Debt funds invest in fixed income securities that are known to generate regular income. Apart from this there are gold funds, index funds, and other sector-specific funds which one can consider investing in to diversify their mutual fund portfolio.

Finding the right balance

Finding the right balance is essential when it comes to mutual fund investments. In order to determine where and how to invest, a mutual fund investor should always determine his/her risk appetite first. A risk appetite is nothing but an investor’s ability to take a certain degree of risk with his/her finances and invest in a scheme with the hope of fetching some capital appreciation in the future. Investors with a low-risk appetite should focus more on debt schemes as they are considered to be a low-risk investment option (however, this may not prove to be true in every situation). Someone with a medium risk appetite can consider focusing on schemes like hybrid funds that invest both in equity and debt instruments. But like we stated earlier, it is extremely important to diversify. A low-risk investor cannot completely depend on debt funds, they need to find the right balance depending on their risk appetite. An example of portfolio diversification for low-risk investors can be

80 percent in debt, 10 percent in equity funds and 10 percent in gold. This is just an example and one should actually consider this in real life.

The final word

Finding the right balance when it comes to mutual fund investing may seem a bit difficult. This is why investors are expected to keep a periodical check on their fund’s performance. If need be, investors should rebalance their portfolios depending on market movements. Also, when choosing a fund, one should delve into the fund’s past performance. It is always better to invest in a consistent-performing fund. Also, investors should check if the expense ratio of the fund is feasible. Investors should also determine whether they want to make a lump sum investment or whether they want to start a SIP. A Systematic Investment Plan allows investors to make systematic payments at regular intervals. You can choose a small investment amount that you can pay every month, but this small amount should meet the minimum investment amount mentioned in the mutual fund offer document. Also, if you feel that you are not able to make an investment decision, it is always better to speak to your financial advisor.

Mutual fund investments are subject to market risk read all scheme-related documents carefully.