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Creating A Well-diversified Investment Portfolio

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Creating A Well-diversified Investment Portfolio
Deepika Asthana - 11 November 2019

The government along with the industry stakeholders have made a concerted effort to drive the savings and ensure families from all income brackets save and invest their money. Mutual funds have played an integral role in this and continue to educate investors on the need and benefits of investing in mutual funds. Yet, there are many individuals and families across the country who shy away from investing in mutual funds for one reason or another.

- Perceive them to be risky – much like equity investments, equity mutual funds can witness sharp volatility and swings in price. Consequently, many investors paint mutual funds with a single paint brush, assuming that all mutual funds are risky. This is, however, not true. Each mutual fund scheme has an idiosyncratic risk level, which is clearly stated in the scheme document. Certain funds investing in low risk investments have lower risk, while those investing in high risk investments have a higher risk. There are funds available along the risk/return spectrum.

- Believe that once they invest they are stuck – a lot of hesitation stems from ignorance or absence of correct information. Many investors feel that once they invest in a mutual fund, they cannot exit their investments when they need the funds the most. While there are some types of funds that have a lock-in period, most funds can be exited by a simple redemption request.

- Find it complicated – there are a multitude of schemes that mutual funds offer. These span asset classes and come with varying levels of risk and return. While you have the broad equity and debt funds, within each category you will have multiple options. An average investor can find this confusing which will impact his ability to make an optimal choice. This is where investor education and correct advice by the financial planner become integral.

- Influenced by previous bad experiences – we are all shaped by our experiences. Those investors who have been scathed by their mutual fund investments are afraid to re-enter the industry, lest they get burnt again. However, just as past gains are no guarantee of future profits, past losses should not stop you from future investments.

- Resistance to migrate from traditional methods of investing – one of the biggest factors that influence an investor’s choice of instrument is a resistance to shunning old investment instruments like bank fixed deposits and government schemes. However, investors need to understand that the idea is not to leave one for another. Instead, the idea is to build a diversified portfolio with multiple instrument so that you have achieved your financial goals.

However, it is now time to change the narrative. All investments should be looked at from a holistic perspective and be aligned with your goals. It is essential that investors create a well-diversified investment portfolio that adheres to their risk/return requirements. In that regard, mutual funds can be a good investment option for your portfolio as they offer exposure to multiple asset classes and styles with varying levels of risk and return. However, it is always best to consult your financial advisor before making any investment decisions.

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