How to Evaluate and Select Mutual Funds for Portfolio Diversification in 2024

Apr 26th 2024
Mutual Fund
Min Risk, Max Gain

In recent years, mutual funds have emerged as the most sought-after investment avenue for Indians. Set aside the high returns on investment, the ease and transparency that come with mutual funds investment make it a winning choice for today’s population. However, despite this, an investor must choose the right mutual fund to get the desired outcome. With a plethora of mutual fund houses available today, sometimes it becomes difficult to make the right choice. 

So, whether you have been already investing in mutual funds and want to diversify and expand your portfolio or you want to make a fresh investment in mutual funds, here, we will give a few valuable suggestions or tips on how to choose the best mutual funds in India in 2023 for investment. 

What is the Meaning of Portfolio Diversification?

Portfolio Diversification involves spreading investments across different assets to limit exposure to any one type of investment. By spreading out investments, the impact of a decline in any one asset is minimized, leading to more stable returns over time. This strategy is aimed at lowering the overall volatility of a portfolio and providing a more balanced investment approach. 

Successful investing involves finding a balance between risk and time horizon. Being too conservative with investments at a young age can result in not keeping up with inflation and not growing enough for retirement. On the other hand, being too aggressive when older can expose savings to market volatility and make it difficult to recover losses. 

Balancing risk and reward in your investment portfolio can be achieved by diversifying your assets. This involves spreading your portfolio across different asset classes to mitigate risk and volatility. Diversification can help reduce the frequency and intensity of fluctuations in your portfolio. However, it is important to note that diversification does not guarantee profits or protect against losses. 

Steps to Evaluate and Select Mutual Funds for Portfolio Diversification in 2024


1. Determine Your Investment Objectives

Having a clear goal or objective in mind is the first step towards choosing the most appropriate mutual fund for your investment. There are two types of investment objectives – short-term and long-term. Long-term objectives can be children’s education, buying a house, retirement etc. On the other hand, short-term objectives can be buying a car, doing home renovation etc. If you want to expand your mutual fund portfolio to increase income, it is recommended to choose income-based funds like debt funds. Otherwise, if you have plans to create wealth over some time, going with equity-oriented funds would be a wonderful idea.

Most importantly, keep in mind that your investment objectives may alter from time to time, and this requires a change of the investment approach accordingly. Ideally, one should assess his investment goals at regular intervals and take necessary actions to accommodate the goals in his mutual fund portfolio.

Above all, you should also take into account your risk-bearing capacity while investing in mutual funds. Choose mutual funds that go along with your risk profile and gel perfectly with your investment goals. In case of a lower low-risk tolerance, choosing debt funds may be better in comparison to equity funds.

2. Check The Fund’s Portfolio

The next crucial factor to think about while choosing mutual funds for portfolio diversification is composition. Don’t forget to inspect the portfolio properties and evaluate the fund’s asset distribution policy. Ideally, the mutual fund should invest in a prolonged portfolio to minimise the risks associated with particular domains or stocks.

In addition, take into account the overall performance of the portfolio constituents. Look for stocks with solid fundaments they are widely preferred over inferior-quality stocks. 

Nevertheless, check the concentration danger linked with the fund's portfolio properties. Funds with extreme concentration risk may not be a wise choice for all investors, particularly those with low-risk acceptance.

3. Evaluate The Fund’s Historical Performance

Before choosing a mutual fund, check a fund’s historical performance. Look at the elements like the fund’s overall returns over the past few years and make a comparison of the same with its benchmark and other likewise funds. Though historical past performance is not a sure shot of getting desired returns, the purpose of this practice is to get an idea of the fund manager's investment plan and how it worked in the past. 

Don’t overall the consistency of the fund’s recital over diverse market cycles. Funds that have given dependable returns over a period of time are generally better than those that have altered widely. It is also crucial to comprehend that the fund’s performance should be checked regarding the ongoing market scenarios.

One important thing not to forget is to check the fund’s volatility while judging its historical performance. Funds having high volatility aren’t appropriate for all investors, especially those with a low-risk bearing capacity.

4. Verify The Fund Manager’s Expertise

The role of a mutual fund manager is important in regard to its performance. Therefore, it is necessary to check the fund manager's experience and record. Try to find out more about fund manager's investment approach and check his experience in the relevant domain.

Also, check the constancy of the fund manager's tenancy. Funds with infrequent variations in their managers are not as good as those with a steady fund management expert.

In addition, experts recommend evaluating the fund manager's aptitude in handling the fund's belongings under varying market scenarios. Fund managers with a proven track record of managing the fund's assets in various market conditions are generally preferred over those with limited experience.

5. Evaluate The Risk Profile

Mutual funds usually carry different levels of risk. This is why it is recommended to check the risk profile of the mutual fund to understand the underlying investment risks. High-risk funds like small-cap or mid-cap funds, may provide better returns, but they are extremely risky and volatile in nature.

Aside from this, check the fund's risk management approach. Funds having a steadfast risk management capability are always better than those with a feeble risk management structure.

Last but not least, evaluate the fund's introduction to precise stocks or sectors. Funds with high exposure to definite domains or stocks are not considered good for all investors, expressly those with a low-risk forbearance.

Why is it Important to Evaluate Mutual Funds in 2024?

To identify the best-performing mutual funds, evaluating mutual funds thoroughly is indispensable. This involves examining the historical performance and returns on investment over some time. Without such analysis, it would be challenging to ascertain the top-performing mutual funds of 2024. 

As an investor, it is crucial to consider more than just a fund’s past performance. Monitoring returns is essential for making informed decisions and achieving better results. Previous fund analysis plays a crucial role in this process. 

Fluctuations in capital markets are a result of changes in the overall economy, causing disruptions in portfolio asset allocation. These changes increase the risk profile, exceeding an investor’s needs. Evaluating similar investments helps in comparing different funds, while periodic rebalancing is necessary for mutual fund portfolios due to various factors like fundamental attributes or changes in fund management. 

Are There Any Diversification Techniques with Mutual Funds?

When an average investor tries to react to the market, they often end up making decisions too late, when 80% of the potential damage has already occurred. It’s important to focus on having a strong offence as the best defence in this environment and maintaining a well-diversified portfolio with a long investment horizon can help navigate market volatility. 

Here are some strategies to consider for achieving diversification in your investment approach. 

  • Diversify your investment by spreading your money across multiple companies and sectors. Consider creating a personal mutual fund with companies you are familiar with. Explore other investment options such as REITs, ETFs and commodities. Look beyond your local market and consider global opportunities. While investing in what you know can be beneficial, keep your portfolio manageable and limit the number of investments. 
  • Consider adding index funds or fixed-income funds to your portfolio for long-term diversification. Index funds track various indexes, providing broad market exposure with low fees. Fixed income solutions can help hedge against market volatility and uncertainty. However, passive management in index funds may not be optimal in inefficient markets, especially during challenging economic periods. 
  • Regularly adding to your investments, particularly through rupee-cost averaging, can help mitigate the impact of market volatility by investing the same amount over time. This approach allows you to take advantage of lower prices by buying more shares and buying fewer shares when prices are high.
  • Although buying, holding and dollar-cost averaging are effective strategies, it is important not to neglect the market forces at play. Stay updated on your investments and remain aware of any shifts in overall market conditions. This will allow you to stay informed about the status of the companies you have invested in and determine when it is necessary to cut your losses, sell your holdings and seek new investment opportunities. 
  • Understanding the value of the fees you are paying, whether it is a monthly fee or transactional fee. These fees can affect your overall profits. Be aware of what you are paying for and remember that the cheapest option may not always be the best. Stay updated on any changes to your fees. 

How to Avoid Common Pitfalls in Mutual Fund Selection?

When considering mutual funds, it’s important to remember that there are various options available and they can be a valuable asset for achieving financial goals. However, it is crucial to be aware of the common mistakes that people often make when investing in mutual funds. By staying vigilant and cautious, you can avoid these errors and make the most of your investment opportunities. 

  • Each mutual fund has unique investment objectives and attributes. It is essential to clearly define your financial goals before choosing a scheme, such as saving fr taxes, buying a home etc. The specific objective of mutual funds can vary.
  • Choose mutual funds carefully by researching types, historical returns, expenses and your risk profile. Use authenticated sources such as the Scheme Information Document (SID).
  • First-time investors may have high expectations from mutual funds but should be aware of market fluctuations and long-term trends for realistic returns.
  • Mutual funds carry risk, so assess your risk tolerance using the fund’s riskometer to find the right investment option for you.
  • Do not invest all your savings in one scheme. Create an emergency fund by setting aside money each month in a separate bank account.
  • Diversifying investments reduces risk but avoids over-diversifying to prevent hidden underperforming funds in the portfolio.
  • Long-term strategy and mindset are smarter than short-term strategy. It is crucial for investing your money. Extended duration and discipline in investment are highly rewarding. 
  • Diversifying your investments in mutual funds is crucial to spread out risks and offset potential losses with gains from other funds.
  • Review your portfolio regularly to ensure it aligns with your financial goals. Periodically evaluate funds to monitor their performance and avoid underperformance or high-risk funds.
  • Do not rely solely on recommendations from people you know when investing in mutual funds. Make sure you understand the fund before investing. Avoid impulsive decisions and panicking during market crashes. Selling the fund before it reaches its goal is an option to consider if you fear losing your principal. Stay calm during market corrections and monitor the fund’s performance before making any decisions.

The Conclusion

Suppose you are looking to diversify your mutual fund portfolio by investing in new mutual funds. In that case, it is better to consult a leading investment consulting company like Investkraft that can help you fulfil your investment objectives quickly, safely, and effectively. Give us a call today and let our mutual fund experts find the most suitable mutual funds for you.




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