Q. We are married, in our 40s and have a daughter. We have been investing in mutual funds for several years and now want to diversify our portfolio. We have moderate risk tolerance. We want to invest in funds that will provide both growth and income. Suggestions, please.
Diversifying your mutual funds portfolio by adding on debt (income) and equity (growth) asset classes can help you manage risk and potentially increase returns.
Here are some steps you may want to follow:
Determine your asset allocation and plan your investments: First, it is crucial to understand the asset allocation of your current portfolio. Then you can plan new investments based on your objectives, risk tolerance, and time horizon.
If you prefer low-risk or have some near-term goals to be met within three years, increase your allocation to conservative hybrid categories (equity savings and debt categories such as low duration to ultra short duration).
Start increasing your allocation to index funds and flexi-cap categories if your long-term objective is to build wealth, and then gradually shift to mid-small cap funds.
Choose a mix of mutual funds: Within equity, you can choose mutual funds that invest in different types of companies, sectors, and geographies. For example, you can invest in large-cap, mid-cap, and small-cap funds, or invest in overseas funds keeping in mind differentiated strategy and mandate.
Within debt, you can choose funds that invest in different types of fixed-income securities and have different durations such as government bonds, corporate bonds, and medium duration bonds.
Avoid too many similar style funds so that there is no duplication. Overdiversifying may lead to dilution of returns in the long term.
Monitor and rebalance your portfolio: It is important to review your portfolio periodically and rebalance it if necessary. For example, if your allocation towards equity investments has increased over time, you may need to trim it down and increase allocation towards debt to maintain your desired asset allocation range.
Overall, diversification can help you manage risk and potentially increase returns. You must choose mutual funds that align with your investment goals and risk tolerance. Remember to regularly monitor and rebalance your portfolio.
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