Should you include loan funds in your equity-heavy mutual fund portfolio?
Never put all your eggs in one basket. I’m sure almost every one of us, whether you’re an investor or not, must have heard of this quote, right?
But have you ever tried to understand the logic behind this saying? The answer is risk mitigation.
Simply put, when you put all of your hard-earned money into a single investment tool or asset class, the returns are entirely dependent on the performance of that instrument, right?
If it climb high and you redeem it, well and good. But what if that bleeds red? You find yourself sitting on a pile of losses, don’t you?
This is exactly why it is always advisable to diversify your investment portfolio. After all, how can you depend solely on the returns of a single investment vehicle or a single asset class?
And that’s especially true if you’re betting big on a risky asset class like stocks by having an all-stock mutual fund portfolio.
The risks of having an all-stock portfolio
While there is no doubt that equity mutual funds can indeed be your best friend for long-term investing, they are relatively much riskier in the short term due to stock market volatility. Even if you also get high returns in the short term, don’t make the mistake of being overconfident because the market also has its share of falls or, worse, stock market crashes.
While your stock-heavy portfolio may currently be glowing green with high returns due to the current market surge, it’s best to have debt funds in the portfolio., reap the benefits of diversification.
Do you wonder why and how? Read on as we unveil the same.
Also read: Frequently Asked Questions (no) – How much tax do I have to pay on my investment in a mutual fund?
Why inject debt funds into your otherwise all-equity portfolio?
Risk and return. These are the two driving factors behind the whole gamut of having an investment portfolio.
Minimizing risk and maximizing rewards wherever possible should be the two goals that anchor your investment in various asset classes and chosen funds.
This is exactly what diversification does. Instead of sticking to a single investment avenue or asset class, diversifying into two or more would allow you to reap the rewards of balancing the risk-reward ratio through asset allocation. assets, especially when the chosen investments have a negative correlation, such as stocks and debt.
Thus, in the case of those who have an investment portfolio entirely in equities, sliding towards a level of diversification by debt mutual funds may turn out to be a wise decision. It can provide your portfolio with much-needed capital protection and stability, especially to weather the downsides of a volatile market, where redeeming an all-stock portfolio can lead to huge losses and bloodshed. your wallet red.
And that’s not all. If you want to understand and learn more about mutual fund portfolio diversification and the associated benefits, Click here.
Read also : Debt Funds vs FDs – Which is the Better Investment Option?
How to diversify an equity portfolio with debt funds?
When it comes to diversifying a portfolio of equity-heavy mutual funds, an investor can opt for a debt allocation to provide balance to their portfolio and a cushion to protect against market volatility. shares.
Now the question arises-How to invest in debt mutual funds to diversify? You can do this in two ways.
One is to invest in pure debt investment avenues such as corporate bond fund, overnight fund, liquid fund, short duration fund, ultra-short duration fund, etc.
The second is to opt for the other category of mutual funds, ie hybrid funds.
Those choosing the first option of investing in pure debt schemes should bear in mind that such an investment strategy would involve a great deal of research and decision-making regarding each of these debt schemes and their historical returns. Click here learn more about mutual funds and Click here to understand how to choose the right mutual funds.
While on the other hand, those who wish to opt for hybrid funds to add the debt component in their mutual fund portfolio would have an easier outcome as the fund manager of the chosen hybrid scheme will handle most of these aspects, thus saving a lot of time for the investor, while ensuring that the expertise and knowledge of the fund manager are the determining factors in the selection of the fund’s investments.
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What are hybrid funds?
For the uninitiated, hybrid mutual funds invest in two or more asset classes, which is usually a combination of stocks and debt in most cases. They aim to provide a balanced component to your portfolio while taking care to achieve the investment objective set for this plan.
And due to the presence of both equity and debt investments, hybrid funds are able to offer the dual benefits of high potential returns during the equity market boom and capital protection through the debt component, to cope with falls in the equity market.
From where, Hybrid funds are often a suitable investment avenue for investors who want a taste of equities and their potentially high returns, without being fully exposed to equity market volatility.
Although the risk in hybrid funds depends on the proportion of equities held in one’s portfolio, this degree of risk would certainly be lower than that of an all-equity investment portfolio. Thus, the presence of debt components in hybrid funds is what offers the investor capital protection and stability, in addition to acting as a cushion during market downturns.
Read also : When to get out of your mutual fund investment? 5 trigger points to remember
While there is no single guide or rule to successfully investing in mutual funds, the simple steps of choosing the right investment avenues (in terms of asset class diversification and fund selection) based on your investment horizon and risk appetite, staying invested for the long term (especially with equities) and periodically reviewing your portfolio’s performance and rebalancing it if necessary, is key of wealth creation. If you don’t know how to choose the right mutual funds, Click here.
Read also : Does it make sense to go the SIP route for mutual fund investments?
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