Investors today recognize the value of a well-allocated portfolio, with funds diversified across different assets. Taking calculated risks through this approach allows for a balance to be struck – something that might deny you good returns if too many of the same type of asset are held, such as mutual funds. Finding the right equilibrium is key and it’s not too hard to do when approached in a sensible fashion.
The Issue of ‘Too Much’
It is clear that mutual funds are a popular choice for investors who want to diversify their portfolios and achieve their financial targets. Unfortunately, it can be tempting to hold more than necessary in a few portfolios, believing this will minimize risks and improve returns. Sadly, this does not happen and returns remain depressed. When multiple demat accounts contain an abundance of similar mutual fund investments, any gains made on well-performing schemes may be cancelled out by low-performance ones.
Too Much of Mutual Fund Investment
When investing in equity funds, the number of stocks you are exposed to can quickly add up – 7-10 funds amounting to a maximum of 500 stocks. Such a broad market exposure presents an issue when trying to generate good returns; ergo, considering an index fund which is cost effective and helps mitigate any losses due to under performance of your funds may be the best option.
A Solution
One issue you can encounter if you have multiple mutual funds is how hard they are to track. But, there is a proper way to handle investing in mutual funds while making sure that your portfolio is well diversified. The ideal method is choosing the right fund in proportions that are correct for you. What’s more, mutual funds give you the ability to rearrange your collection periodically. This way, you can distinguish under-performers and eliminate them from your portfolio. There isn’t any set number of funds you should own for a successful portfolio, but there’s an intelligent way of deciding what amount to hold. Investing in equities will present investors with plenty of choices; this plethora may be overwhelming with small-cap, large-cap and mid-cap funds flooding the market.
Analysts suggest that a well-balanced financial portfolio should include between three and five mutual funds, such as a contrasting blend of multi-caps, one large-cap and a mid-cap. Should you have an appetite for high risk investment, adding a fund of small-caps may be beneficial; however, it is important to bear in mind not to choose funds with the same stocks due to their redundancy. Furthermore, the inclusion of liquid funds in your portfolio is recommended; this helps you generate savings for unexpected events.