Mutual Funds: Why diversification matters - What investors should know

Mutual fund advisors often found asking investors not to put the whole fund in one scheme. They always advise mutual fund investors to diversify their portfolio. But, the question is, how many mutual fund investors understand the actual meaning of diversification of funds? Asked from various investment experts, they said in unison that diversification of funds means putting money in all categories like large-cap, mid-cap and small-cap mutual funds.

Speaking on the need for diversification of funds Kartik Jhaveri, Director — Wealth Management at Transcent Consultants told Zee Business Online, "Diversification of fund allocation allows an investor to maximise his or her investment as one scheme failure can be pared by other scheme's gain." Jhaveri said that putting entire fund in one scheme is dangerous as your return is totally dependent on the performance of one scheme. He advised investors to invest in all categories and asked people to monitor the performance of the scheme they have chosen. "In large-cap mutual funds, movement is slow, in mid-cap mutual funds the movement is faster than large-cap but slower than small-cap while in small-cap the movement is fastest among all categories. So, investment in large-cap schemes help you switch on time as small-cap movement is enough to understand the direction in which the scheme is going towards," said Kartik Jhaveri.

Standing in sync with Kartik Jhaveri's views, SEBI registered investment expert Jitendra Solanki said, "It's true that small-cap mutual funds give more returns but in the long-term perspective. In the short-term, all categories give more or less same returns. So, an investor is advised to go long say more than 10 years to maximise his or her returns." On how much one should invest in the three categories mentioned above, Solanki advised to invest around 40 per cent in small-cap mutual funds while rest should be equally invested in mid-cap and large-cap mutual funds. He also said that one should not invest in a large number of schemes. Five to six schemes are enough to diversify ones' investment.