SHARETIPSINFO >> Articles Directory >>How to diversify a mutual funds portfolio?
Mutual funds are basically a consolidated fund that collects money from the investors and then invests that amount in stocks, bonds, and other type of securities to earn profit. Then that profit is distributed among the investors. You can invest in the mutual fund by buying the shares of the mutual fund. The valuation of the mutual fund is generally denoted with the Net Asset Value of the fund. Investing in the mutual funds is a good way to earn more return from your investment without taking too much risk. It is an intermediate way between the stock market and low yielding bank accounts. When you are investing in the mutual fund you are getting more return than the bank interest but at the same time you are not taking as much risk as the stock market.
But as most of the mutual funds invest in the stock market they are also viable to profit and loss. Therefore, you as an investor should also take some measures so that you can minimize the risk while getting maximum possible return from your investment. Like your stock market portfolio, diversification of your mutual fund portfolio is also an effective way of minimizing your risk. By the way of diversification it is possible to effectively reduce the risk as different types of mutual funds have different level of risk. By planning your mutual fund investment and by keeping a balance of different types of funds you can ensure that you run minimum risk while you get optimum return. Here we are presenting different types of mutual fund and their features and ways to diversify your mutual fund portfolio.
Types of mutual funds
The most common mutual fund in the market is the equity funds. These are the funds that invest primarily in the stocks. This type of funds ensures maximum profit for the investors but then has high risk of investment. There are different types of equity funds as well and that division is done on the basis of the type of stocks in which the fund invests. Those funds that invest in the large cap and blue chip companies that have a sound financial standing in the market are termed as value funds. These stocks that may not give high returns in short time they are the safest investment option simply because these stocks move up in a steady manner. Then there is the growth fund that invests their money to the new breed technology companies. These funds are great way to earn good profit in short period of time but then these stocks are risky to invest and so is the risk of growth funds. Then there is the balanced fund where the fund managers try to strike the balance between the growth stocks and value stocks. As an investor you should invest in the growth funds if you are looking for good profit and if you want your investment to be safe you should choose the value funds.
Apart from the equity funds there are the index funds that are modeled after the popular indexes of major stock exchanges. These funds maintain a portfolio that is identical to the target index that it is modeled after. These funds offer good returns as they have the same stocks in the same ratio that of the index. This is no doubt a safe investment option in mutual funds.
There is another type of mutual fund that also invests in the stocks and they are the specialty funds. These are the funds that invest in stocks from specific sector or industry. Most of the specialty funds target the most promising sector and hence they offer good return at the end. But as there is less diversity in the fund portfolio there is some amount of risk associated with these funds.
Diversification of mutual fund portfolio
These are different types of mutual fund that you can choose to diversify your mutual fund portfolio. You have to plan your mutual fund investment depending on your fund, time period for which you are willing to invest and of course your risk tolerance. You can surely choose to invest in more fund of different nature to diversify your investment and to strike profitability and stability of your investment.
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