Mistakes You Need to Avoid When Diversifying Your Mutual Fund Portfolio

Selecting the right assets to diversify your mutual fund portfolio can be quite tricky. You not only need to consider the returns but also need to analyze the risk factors and know if it fits perfectly with your financial goals. 

Have you ever asked yourself as to what is the basic tenet of managing mutual fund investments? Well, it’s diversification. 

Investors can add different types of investments to their portfolio to prevent a tandem movement of the overall returns. During volatile market conditions, the low returns from one asset can be easily cushioned with the high returns obtained by another. 

In simpler terms, spreading your hard earned money into different assets provides risk-reduction benefits. But, when diversification plays an important role in managing your portfolio, it is also important to choose the right assets that match with your goals. This being a very comprehensive task, there are chances for certain errors.

Mentioned below are some of the mistakes you always need to watch out for. 

Not considering all your investments

Before you start diversifying, you need to list out all your investments. Later categorize them based on their asset classes. People often forget to include investments made in PPFs or stocks and only consider the investments made using their monthly savings. By doing so, you might take a wrong decision when it comes to calculating the risk and returns from the portfolio.  

Holding on to many investments

A bloated mutual fund portfolio is a big no. If you are holding on to a number of investments expecting high returns in future, you are just diluting the benefits you might get from diversification. Adding on new investments does not reduce the risk but instead increases it due to poor choice of assets. 

You need to focus on well-performing funds and get rid of investments that are associated with high costs. 

Never buy what you do not understand

Before diversifying your portfolio, you need to know the right mutual funds to invest in. Never invest without studying the features of the fund. 

But, there is a flip side to this as well. If you are investing in the funds that you only understand, you might as well end up having a concentrated portfolio. This is when you need a financial advisor.  You can use the best direct mutual fund platform that provides investors with various online tools and expert financial advice. 

Never lose the sight of your goals

Your goals can be at risk if your asset allocation is not in sync with them. For example, an investor who is heading towards his/her retirement needs to focus on an asset allocation that can generate regular income post retirement. 

So, avoid the above-mentioned mistakes to make sure that the process of your portfolio diversification is successful.