Investing in mutual funds is one of the easiest ways for individuals to build wealth over the long term. These funds pool money from multiple investors and invest in a variety of assets such as stocks, bonds, and commodities.

However, just investing in a single mutual fund is not enough. It is important to diversify your mutual fund portfolio to reduce risk and increase returns. We will explore the necessity of diversifying your mutual fund portfolio and how to do so in this article.

Rebalancing is important

Reduced risk is one of the primary reasons to diversify your mutual fund portfolio. The impact of market volatility on your assets can be mitigated by a well-diversified portfolio.

Furthermore, diversification helps you to profit from diverse asset classes that may perform well at different times. For example, if you put all of your money into a mutual fund that solely invests in technology stocks, you may miss out on possibilities in other industries such as healthcare or energy.

Systematic asset allocation

A systematic asset allocation framework should be used to diversify your mutual fund portfolio. This entails categorising your investments as stocks, bonds, or commodities, and then investing in mutual funds that specialise in each of these asset groups.

This ensures that you have exposure to a variety of investments while also mitigating the impact of market volatility on your portfolio.

For example, you might allocate 50 per cent of your portfolio to equity mutual funds, 30 per cent to debt mutual funds, and 20 per cent to liquid mutual funds. Within each asset class, you can further diversify by investing in mutual funds that focus on different sectors or regions.

How often should you rebalance?

Once you have created a diversified mutual fund portfolio, it is important to evaluate and rebalance it regularly. This means reviewing your investments periodically and making adjustments as necessary.

For example, if one asset class has performed well and has a larger share of your portfolio than you intended, you may need to sell some of those investments and reinvest in other areas to maintain your desired asset allocation.

The frequency of evaluation and rebalancing depends on your individual investment goals and risk tolerance.

Some investors prefer to rebalance their portfolio annually, while others do it quarterly or even monthly. It is important to remember that over-diversification can also be a problem.

Investing in too many mutual funds can make it difficult to keep track of your investments andcan result in excessive fees and expenses.

Once you’ve diversified your mutual fund portfolio, it’s important to evaluate and rebalance it on a regular basis. This means reviewing your investments periodically such as every six months or annually and adjusting as needed.

For example, if your stock funds have performed exceptionally well, they may make up a larger percentage of your portfolio than you originally intended.

In this case, you may want to sell some of those funds and reinvest the proceeds in other asset classes to maintain your desired asset allocation.

It’s also important to remember that your investment goals and risk tolerance may change over time.

As you get closer to retirement or experience major life changes, you may need to adjust your portfolio accordingly.

Regular evaluation and rebalancing can help ensure that your portfolio continues to align with your financial goals and risk tolerance.

Conclusion

Diversifying your mutual fund portfolio is essential for minimising risk and maximising returns.

However, it’s not enough to just invest in a single fund and forget about it. Regular evaluation and rebalancing is necessary to ensure that your portfolio remains aligned with your investment goals and risk tolerance.

By following a systematic asset allocation framework and rebalancing your portfolio as necessary, you can achieve a well-diversified portfolio that can help you achieve your financial goals over the long term.

Karan Batra is MarketsMojo’s chief product officer. The views, thoughts, and opinions stated in this article are his own and do not necessarily reflect the views of MarketsMojo or the management.

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Gobinda Biswas, email

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Is it possible to prematurely close NSC before the completion of its tenure? Are there any conditions relating to premature closure?

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