scorecardresearchMutual Funds: Why should you diversify your investment across schemes?

Mutual Funds: Why should you diversify your investment across schemes? An explainer

Updated: 20 Apr 2023, 08:27 AM IST

Diversification is seen as inherent in all mutual fund schemes but investors still need to diversify their investments across categories to avoid concentration of risk

Mutual fund investors need to be mindful of the risk they run at the time of investment

Mutual fund investors need to be mindful of the risk they run at the time of investment

One of the key goals of investors is to earn gains besides ensuring to keep their investment safe.

This means investors aim to ensure the return of their capital is more important than the return on capital. And to keep the capital secure and safe, investors are recommended to diversify their investment across funds across the risk spectrum.

Let us understand this with an example. If Mr Aman has 5 lakh total capital, and wants to invest in mutual funds then investing in only category of funds, or schemes is not recommended. In order to enable a proper asset allocation, he must divide this capital across categories such as index funds, debt funds, thematic funds, large caps and gold ETFs, among others.

Although one cannot, and should not, invest in all the fund schemes but investing in a wider investment pool is a tried-and-tested way to keep the capital safe from going down under.

“One of the safest fund schemes for retail investors are index funds. One part of portfolio may be invested in the debt funds as well. Then if someone wants to invest in the short term, one can also consider money market funds and thematic funds as well. The choice of funds is totally dependent on the investor’s risk appetite and financial goals,” says Sreedharan S, Founder of Wealth Ladder Direct.

Some experts suggest that only investors with a high-risk appetite should invest in thematic funds and the allocation should be kept to the minimum.

“Total investment in thematic funds should not exceed 10 percent of portfolio,” says Ravi Saraogi, Co-founder of Samasthiti Advisors.

An array of options

There are plenty of mutual fund options to choose from. For instance, one can opt for equity funds, debt funds, gold ETFs, fund of funds investing overseas. And within equity, one can choose between large cap, multi cap, flexi cap, mid cap and small cap.

One can also opt for index funds which are considered safer in the long run. Then there are a number of hybrid funds which include dynamic asset allocation funds.

The latest AMFI data shows that there are 1,455 mutual fund schemes in India out of which 315 are debt schemes, 390 equity schemes, 138 hybrid schemes, 36 solution-oriented scheme, among others.

Categories                  Number
Debt                         315
Equity                       390
Hybrid                       138
Solution-oriented       36
Others                     576
Total                    1,455

Number of mutual funds

It is not advisable to get too carried away with mutual fund adverts that assure mutual funds, by definition, invest across a number of stocks. It is true in some cases but not always. When a mutual fund is confined to (say) small cap stocks then its risk element naturally will increase because small cap funds are highly volatile and hence, only a small portion of portfolio should invest in small cap funds.

Likewise, a gold ETF or a debt fund tend to allocate its funds to gold or debt securities alone – thus exposing investor’s portfolio to either gold or debt, respectively.

In conclusion, we can say that investors ought to allocate their investment across a number of mutual fund schemes instead of investing in only one scheme or other. The more schemes — and importantly – the more fund categories you opt for, the more diversified your portfolio becomes.


Diversification is a way to reach long-term financial goal while minimising risk. 
First Published: 20 Apr 2023, 08:27 AM IST