Mutual fund investments
This article mainly focuses on the diversification of investments in mutual funds which helps the investor to get a good return. Investment diversification makes an important role. Different categories of mutual investment help you to diversify your risk into lower levels.
How important is diversification in investment suppose you have 1 lakh rupees.
How can you invest the 1 lakh into different places?
How much you can invest in assets, and how much in mutual funds?
Diversification will help to fulfill two objectives one is risk and the second one in return. If you invest the amount in multiple segments, you can minimize the risk and make an optimized portfolio. If you are investing the money in a single share your risk will be higher, and you may or may not get a high return.
If you are investing the money in different mutual funds you can diversify your risk. You have 1 lakh rupees in your hand and you are dividing that amount into 5 equals like 20000, we can check how many ways we can invest those 20000 and minimize the risk. We can invest in 5 different mutual funds. If any one of the mutual fund is not performing well. This diversified strategy will help you to normalize your return.
Different types of mutual fund investments?
If you have funds to invest you have multiple choices are available to invest in mutual funds. From here we can discuss the broader categories of investments in mutual funds.
There are 4 types of mutual funds available, Equity mutual funds, debt mutual funds, bonds, and hybrid mutual funds.
What are the subcategories for equity mutual funds?
Large Cap funds, mid-cap funds, Small Cap funds, Sectoral funds, ELSS (equity-linked savings schemes).
What are the types of debt mutual funds?
Dynamic bond funds, liquid funds, credit risks, gilts funds, short-term funds, and ultra-short-term funds.
From there, we are going to check how broadly we can diversify the investment.
From your total investment 30% of the investment you can choose to invest in a risk area and the rest you can invest in debt funds because it’s slightly less risky. The 30% of the fund you can invest in equity, here the risk will be higher and the return also will be higher.
So you have planned to invest 30% in equity then the next question will be how I can make the investment. Here you can adopt 3 different categories of investment large-cap funds, mid-cap funds, and small-cap funds.
Large-cap funds
Large-cap companies are large well established companies and they have a good amount of market share. Usually, 20000 crores or more companies are considered large-cap companies. These companies perform very stable and are very less volatile in nature and they hold a good reputation as well. Investing in these stocks is a good option.
Mid-cap funds
Mid-cap companies are small companies compared to large mid companies, the market cap of these companies is more than 5000 crore and less than 20000 crores. These companies perform less stable and are more volatile in nature. In long term, there is a chance of getting these companies into large-cap
Small-cap funds
Small-cap companies are small companies and they have a market share of fewer than 5000 crores. Compare to large and mid they are very less stable and highly volatile in nature. Investing in these companies is risky compared to large and mid-fund.
The 30% of investments you can invest in small cap. In this case, the risks are high due to the volatility chances of getting a return also being high.
If you don’t want to take the high risk so you can invest 10% in the large-cap 10% in the mid-cap and 10% in the mid-cap.
The other option you can invest 20% in large-cap and 5 % in small-cap and another 5% in mid-cap. In this case, the risk will be significantly less.
All these kinds of diversification help you to reduce the loss and the overall portfolio will be good.
What are the advantages and disadvantages of mutual funds?
Advantages of mutual fund investments
- Diversification of funds. it will help to reduce risks.
- benefit from daily liquidity. redemption of a mutual fund is much quicker
- than professional investment management, you can hire a portfolio manager to handle your investments.
- it is lesser cheaper in nature
- Mutual funds are regulated by a government body
- Tax benefits while investing in mutual funds
Disadvantages of mutual fund investments
- fees, there are many fees including portfolio manager charges, etc
- Dilution
Conclusion
Mutual funds are diversified in nature and it is controlled by government bodies. In India, it is controlled by the securities and exchange board of India. In Hong Kong is controlled by two authorities (1) the securities and futures commission (SFC). (2) The mandatory provident funds schemes Authority (MPFA), Etc.