Diversified Mutual Funds: How to Diversify Investments using Mutual Funds

While mutual fund diversification can reduce risk, it can also help the investor with continuous profits. The process also helps in earning higher returns and protects the investor against the downside of regular readjustment due to market developments.

When a person diversifies their investments, they spread the risk in different instruments. Such investments can lower the impact of a bad investment. For example, a person can get protection against an investment that is falling with an instrument that is rising. Different investment such as shares, stocks, bonds, etc. don’t fall at the same time, which is why a person should diversify to reduce the risk. Many investors allocate their assets in different sectors for diversification as it helps them earn higher returns and fend off the market risks.

When a person invests in mutual funds, they can allocate their investments in different sectors such as equity, debt, etc. They can spread the risk when they make such an allocation. One of the easiest ways to diversify investments is with mutual funds.

Here are different mutual funds that can help a person diversify their investments-

• Debt Mutual Funds

  Debt mutual fund investments comprise of fixed income instruments, such a corporate and government bonds, treasury bills, corporate debt securities and other money market instruments, corporate bonds, etc. They offer higher liquidity. Debt funds can also offer higher yields over a long time. Moreover, such funds are low at risk. They are also tax-efficient when a person stays invested for a longer duration.

• Equity Mutual Funds

  A person can invest in mid-cap, multi-cap, small-cap, and large-cap funds. An investor must know the amount of risk they want to take while investing in equities across industries and different asset classes. However, an investor can earn higher returns with equity funds compared to debt funds.

• Balanced Mutual Funds

  The risk with debt funds is low compared to equity funds, but the returns can be high with equity funds in comparison to debt funds. However,balanced mutual funds are investments made in debt as well as equity funds. Such funds offer good diversification as they reduce the risk of equity and can help in garnering higher yields.

  While mutual fund diversification helps in reducing the risk, it can impact higher yields as well. There are many cases when the market can rise or dip, but diversification helps investors protect themselves against such situations. If investors want to know how to diversify mutual funds, then they need to understand the market.

Diversified mutual funds help an investor find security with different instruments such as equity, debt, cash, etc. An investor can diversify even under such sectors. It offers a person more security for their investments.

For example, a person buys only stocks of a company. In such a situation, there is no diversification of investment. If the market falls, then the person can lose their entire investment as one cannot earn profits from other instruments.

However, a person should know the difference between diversification and invest in different mutual funds. Many people invest in two mutual funds which offer the same holdings. In such situations, the investments aren’t diversified. If their price dip, then the investor will lose money with the two mutual funds. An investor should diversify as per the holdings of the mutual funds.