Why Should I Invest in More Than One Mutual Fund?
“Don’t put all the eggs in one basket.” This is a major fundamental on the basis of which the mutual funds are structured, as ‘Diversification’ is one of the biggest traits of investments made in them. The common question which vexes many investors is that - “How many funds (schemes) should they have in their portfolio?” You too might be having such query in mind. Let’s figure out its solution.
The Essence of Diversification in the Portfolio
Putting all your hard-earned money into a single mutual fund is avoidable, because in case due to a sudden market fall, your fund’s performance falls, then your entire investment suffers. A diversified portfolio is the one which holds various funds having investments across diverse segments of the market to balance the risk-reward equation. Diversification is all about creating a combination which helps one in keeping minimum risk that arises due to market volatility or a sector-specific downturn. Hence, more number of funds would mean that the risk is diversified and you get enough opportunities to earn greater incomes.
Does It Mean One Should Invest in So Many Funds at a Time?
A big no! Diversifying investment never means that one should hold a large number of funds in the portfolio at the same time. This is because it is such a difficult task to manage a large number of schemes in the portfolio at the same time. It may even reduce the profitability of the fund as over-diversification is also risky. Hence, it is a must for an investor to hold such a number of funds in the portfolio which can help one achieve the desired returns within time. The portfolio must be designed after analysing the market and matching investment objectives with that of the schemes. A limited number of schemes only can yield the desired profits for the investors.
What Should Be the Limited Number of Funds, and Why?
There isn’t any magic number of funds that would act perfect for the investors. The main objective of creating a portfolio is to make it sound enough to fetch the desired returns. If we consider the case of the common investors, the major investment objectives they have include capital growth, financial stability, and a tax-saving solution. According to that, an investment in the equity plan, debt fund, and one ELSS scheme is enough. However, which subcategory of the equity & debt mutual fund suits them further depends on their financial status, risk-bearing capacity, and the ultimate goal of investing. Taking proper guidance from the industry expert is quite essential in such a circumstance.
Conclusion - To maintain a balance between risk & reward, one must opt for more than one mutual fund in the portfolio. This helps in minimising the risk exposure to a single mutual fund investment. However, this is also important to add an optimum number of funds in the portfolio to avoid over-diversification which may reduce the profit-generating capacity of the portfolio. Mutual funds provide the best solution to every financial need; you just need to grab more knowledge of the funds and match them with your objectives to make the final selection.
At MySIPonline, you can invest in the best mutual funds online by taking assistance from our team at the Investment Planning Desk. You may ask your fund-related queries from our team to make an adequate decision in terms of fund selection for your portfolio.
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