The key to managing investment risks and using asset volatility to your advantage is diversification. With a balanced asset allocation strategy, you can create a portfolio that helps you iron out your performance and minimize your risk.
There are 5 types of mutual funds that you can use to diversify your portfolio:
Equity mutual funds
Funds that mainly invest in company stocks and shares are known as equity funds. This forms the largest category of mutual fund investments and can be subdivided in various ways.
- By size
Small-cap stocks belong to companies having a market capitalization of less than Rs. 5,000 crore. Then there are mid-cap stocks, whose market cap ranges between Rs. 5,000 and 20,000 crores and have significant growth potential, but so is the risk. Finally, large-cap stocks are offered by the companies that dominate the market and have a capitalization of over Rs. 20,000 crore.
- By objective
Some equity funds are sector-specific, meaning they invest in particular sectors like infrastructure or banking. You can also decide to invest in index funds, which mirror the strategy of the index they are based on (e.g., the BSE Index). These are ideal for investors who don’t want to rely on fund managers as well as limit their losses. Another objective you can fulfill is saving on taxes by investing in equity-linked saving schemes (ELSS).
Debt mutual funds
This type of fund typically invests in fixed-income securities like company debentures, government bonds, and so on. These are intended for risk-averse investors whose priority is to generate stable and consistent returns. Other examples of such funds include treasury bills, fixed maturity plans (FMPs), liquid funds, gilt funds, short-term plans, and many others.
Money market mutual funds
These funds allow you to invest in the cash or capital market, also known as the money market, including securities in the form of bonds, treasury bills, certificates of deposit, etc. Like debt mutual funds, these are also suited for investors with low risk appetites who want to invest in short-term instruments while earning better returns than a savings bank account.
Balanced or hybrid mutual funds
Comprising a blend of equity and debt funds, these funds allow you to invest in both bonds and stocks to create a balanced portfolio. Not only that, but you can also throw other asset classes like money market instruments in the mix, thus reducing exposure in each category. The investment ratio across classes might be variable or specified, but most of them are equity-oriented, which means about 40-60% of the fund goes to shares and stocks. These funds are ideal for investors who aren’t completely risk-averse but, at the same time, are looking for relatively steady capital appreciation.
Exchange-traded funds (ETFs)
This popular investment option is not a mutual fund but works like one. ETFs are basically a collection of various investment avenues such as bonds, shares, and money market instruments. Structured, regulated, and managed like mutual funds, ETFs can be traded on the stock exchange.
It’s important to identify your risk tolerance and determine your investment goals before choosing a combination of mutual funds. The smartest way to go about this is to compare different funds, which you can easily do on the Tata Capital Moneyfy App.