Diversification & Asset Allocation via MFs

Mutual Funds are the best vehicles to do proper Diversification & Asset Allocation of your Money. So What it means by Diversification & Asset Allocation and why these are important?

What is Diversification -

Well, Diversification means spreading your money across the same asset class. Say for Example Equity. If you invest your money in some Equity Diversified mutual fund than your fund manager will spread your money across the different segments such as Banking, Metals, Technology, Textile, Automobiles, Consumer, Energy, Financial Services and many more….

The logic behind diversifying your money is that, Because different economic sectors will perform differently in different economic cycles. So diversifying your money will reduce the over all risk and improves the return.

You must have heard the following sentence often, “I have lost all my money in the stock market”. This is because they have put all of their money in one sector only and lost is.

What is Asset Allocation? -

Asset allocation means spreading your money among the different asset classes. Such as Stocks, Bonds, Gold, Real Estate, Art & Businesses.

As a rule, Asset allocation should be done among the asset classes which have negative correlation. The best example is Equity & Debt. Both have negative correlation means when the equity will be up, the debt will be down and vice versa. If you have done a proper Asset allocation than it means that, you have reduced the chances of risk.

Why Mutual Funds?

Mutual Funds are the best way to do proper Diversification & Asset allocation. Mutual funds are easy to manage and are professionally managed. So you can any time change your Investment Strategy also.

Say for Example if you have Rs.10,000 to invest in Equity than you can’t do proper diversification with such a small amount. Because a stock of Reliance Industries will cost you Rs.2000. So it is impossible to do Diversification with this much small amount. But instead of that, if you invest this much money in some good Equity Diversified mutual funds than the mutual fund has a portfolio that it has build from pulling the money of several small investors like you and me so it will be very easy and convenient to achieve the diversification with such a small amount of money.

So Mutual Funds are the best way to build your portfolio.