Things to note while Investing in Diversified Mutual funds

ByAmrina Alshaikh

Before you plan to invest in diversified equity funds in India, you must have a general understanding of the topic of mutual funds diversification. It refers to investing in more than one fund across multiple market sectors and capitalization, to reduce systematic risks related to the investment portfolio.

Now a question may arise regarding the importance of investment in diversified funds in India. Here are some reasons behind it –

  • Investing in diversified funds mitigates the overall portfolio risks, and in the long run, it helps to generate higher returns.
  • It reduces the time spent in monitoring one particular portfolio as all investments made in a diversified portfolio will not have the same impact at the same time.
  • Investing in different mutual funds at a time will balance the overall risks and returns. If a loss is incurred on account of one fund, then the profit from another will balance out the returns.
  • It helps the investor to achieve higher returns in long term investment plans.
  • Investors can avail of the benefit of compounding interest. Interest on the principal amount, along with the accumulated interest, of the previous years, gets generated from each investment in the diversified equity funds In India.
  • It helps to protect the investor’s savings and offers peace of mind.

Things one must remember before investing in Diversified Mutual Funds.

If you have already decided to invest in diversified equity funds in India, keep these things in mind and check the contract thoroughly for no future contradictions.

  • One must consider investing in diversified mutual funds in India only if the investor has a long term investment horizon. The minimum term for investment is five years.
  • You must have an investment objective that is helpful in the long run like retirement planning, or child’s education planning. One must have a financial goal.
  • Investors need to compare the estimated returns across funds under the same diversified fund category, and not with any other category. In case you are investing in the large-cap diversified fund’s category, you can compare the estimated returns with other large-cap diversified funds. However not with the mid-cap or small-cap diversified funds category. With this, you can estimate the return in the long run.
  • Investors need to look for individual benchmark indices of all the funds and analyze the amount of return to be expected in the long run. Generally, the equity funds perform better than their benchmark indices unless faced with some adverse economic crisis.
  • Compare the past performance of the funds you are going to invest. That will give you a clear image of its stability and sustainability during any adverse condition of the market and throughout the market cycle.
  • Investing in diversified funds will have higher transaction fees, and therefore there are some additional charges including the expense ratio, the investor needs to bear. It may affect the net returns. So one must check all the extra charge beforehand.
  • Compare all the risk factors that are associated with the investment portfolio of different funds category.

Always try to keep a basic understanding of the investments before going to an agent, and once you are determined to invest, check everything properly so that no problem arises in the long run.