How to Build a Diversified Mutual Fund Portfolio

The Indian mutual fund industry has witnessed a tremendous growth in the last decade, with the Assets Under Management (AUM) crossing the Rs. 30 lakh crore mark in 2022. Mutual funds offer investors a diversified investment option, which helps in reducing the risks associated with investing in individual stocks or bonds. A diversified mutual fund portfolio can provide the much-needed stability and growth to an investor’s financial plan.

So, how can an investor build a diversified mutual fund portfolio? Here are some key steps to follow:

1. Define your investment goals: Before investing, it is important to have a clear understanding of your investment goals, such as the amount of money you want to accumulate, the time horizon of your investments, and your risk tolerance. This will help you choose the right mutual funds to invest in.
2. Determine your asset allocation: Asset allocation is the process of dividing your investments across different asset classes, such as equity, debt, and gold. Your asset allocation should be based on your investment goals and risk tolerance. For example, if you are a conservative investor, you may want to allocate more of your investments to debt mutual funds, while if you are an aggressive investor, you may want to allocate more to equity mutual funds.
3. Choose mutual funds across different categories: Once you have determined your asset allocation, you should select mutual funds across different categories. For example, if you have decided to allocate 60% of your investments to equity mutual funds, you can choose funds across large-cap, mid-cap, and small-cap categories. Similarly, if you have decided to allocate 40% of your investments to debt mutual funds, you can choose funds across different credit ratings and durations.
4. Look for diversification within mutual fund categories: Even within a particular mutual fund category, it is important to look for diversification. For example, within the large-cap category, you can choose funds that invest across different sectors, such as banking, IT, and pharma. Similarly, within the debt category, you can choose funds that invest in different types of debt securities, such as government securities, corporate bonds, and money market instruments.
5. Keep a long-term perspective: Building a diversified mutual fund portfolio is a long-term process. It is important to review your portfolio periodically and rebalance it, if necessary. However, it is also important to avoid making frequent changes to your portfolio based on short-term market fluctuations. Mutual fund investments should be made with a long-term perspective, and investors should be patient and disciplined.

In conclusion, building a diversified mutual fund portfolio requires a clear understanding of your investment goals, asset allocation, and selection of mutual funds across different categories. It is important to look for diversification within mutual fund categories and to keep a long-term perspective. With these key steps, investors can build a well-diversified mutual fund portfolio that can provide stability and growth to their financial plan.

If you are looking to build a diversified portfolio in a structured manner sign up here with FundsVita today and book a slot with us to help you map your financial goals with your portfolio.