Learn About Mutual Fund Categories To Include In Your Portfolio

There is always a dilemma among investors on choosing the assets. It is always advisable to have a diversified mutual fund portfolio. The best way to do this is by partially investing in many categories to distribute the risk. Your approach should include consideration for the investment horizon, risk tolerance, etc., to ensure balance.

The common mistakes in this involve buying many funds in the same category or over diversifying. Both approaches diminish the purpose of this method. It is not necessary to add every scheme for diversification as this only causes underperforming assets. You must pay special attention to the categories you choose to ensure proper risk distribution. 

Here is a list of mutual fund types based on asset class to guide you: 

Equity funds: These funds inherently get invested in diversified stocks of various companies. The invested capital gets pooled in by funds from different investors to make the share capital. The profit on these funds depends on the company performance they get invested in. You gain during price hikes and lose when the price drops. Hence, they are associated with the highest risk comparatively. 

Debt funds: These are invested in fixed-income securities like bonds and treasury bills. Your investments get segregated in fixed maturity plans, liquid funds, gilt funds, monthly income plans, short and long-term bonds, etc. Choose the duration according to your financial goals. It is an excellent asset to have in your mutual fund portfolio for regular fixed returns with minimal risks. 

Money market funds: These funds are invested in cash market securities, unlike other stock market asset classes. They are open-ended and fulfil short-term needs with an average maturity of one year. You get them from banks and financial institutions in the form of bonds, dated securities, deposit certificates. Your gain from them in regular dividends. They are ideal for risk aversion investment. 

Hybrid funds: As the name suggests, it is a comprehensive fund that allows you to invest in debt and equity instruments. It ensures a blend of high-yielding returns with sustained security. The choice of the distribution of both depends on your risk preference and investment objective. You can regularly conduct a mutual fund portfolio analysis to change its proportion anytime. It gives the best of both asset classes. 

Other funds: There are many different categories based on structure, investment goals and risk. Most of them overlap and represent distinct objectives. It is best to learn about them in-depth and consider the asset class's further classification to create an effective investment portfolio.

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Created on Apr 26th 2021 07:29. Viewed 242 times.

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