Do you feel it’s worth your time & risk to have a single equity fund in your portfolio, or does investing in multiple mutual funds & getting exposure across varied sectors sound better?
Many of us face this issue when starting out and in puzzlement, we choose to pick one fund & decide that’s it. But why place all your eggs in one basket when you can enjoy better returns with less risk on your investment in multiple sectors simultaneously?
Sounds Astonishing, right?
This means for creating an effective long-term solution for your long-term objectives, what you need is to at least add 6-8 equity funds of diversified sectors in your portfolio upon considering the risk tolerance.
Multiple factors come into play while investing which include- tax planning, objectives to achieve, values & growth perspective, required time, lower risk & maximum returns.
Well, let’s dive into multiple reasons why a portfolio is better than a single equity fund.
Reasons why a portfolio is better than just a fund-
Risk and Returns-
When you carry an individual stock, you carry the whole risk or fluctuations of that company’s circumstances. This may vary from their ongoing market condition, internal issues, manufacturing defects, natural disasters, or any legal complications, which might affect their market share.
All these prove to be a state of higher risk and you might end up with negative returns.
Since this entire situation could happen to only one company at a time & is not likely to happen to all companies at once.
That’s when the case of equity mutual funds or creating a portfolio arises. Although they also bear a higher risk due to the asset classes they invest in, they possess a diversified portfolio. This ensures that any negative returns on a single stock or fund can be counterbalanced by the returns produced by another stock.
Thus, when you invest in mutual funds, you can escape from cases of negative returns.
A portfolio is arranged in a holistic planning method
When planning for an investment, you consider multiple objectives, income sources, necessities, and the time duration required to acquire your goal. So, when you opt for an individual fund, it surely can’t fulfill all your short and long-term goals effectively.
With a portfolio of funds to sink in, your manager understands what you want to accomplish and thereby helps you build a plan strategically on where and how much funds to invest.
This ensures that your manager covers diversified sectors, large- and small-scale companies, and national and international organizations and constructs and manages a portfolio that aligns both your value & growth and saves you from market downturns.
All these are done by keeping in mind your risk tolerance, growth requirements, emergency fund, and tax mitigation strategy.
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Exposure and diversification across sectors within equity
With the growth of businesses in varied industries & technologies you encounter, there is an ample number of opportunities available to invest in the equity market for experiencing exposures across multiple sectors of various sizes or say market capitalizations
So, depending upon your short or long-term objectives and goals to meet, you need to invest in a specific proportion of distinct sub-asset classes and market categorization.
You can carry large-cap, mid-cap, or small-cap equity funds in your portfolio pursuing different strategies, such as growth or value investing. The investment should be done according to your risk tolerance capability and low correlation to ensure exposure to growth opportunities from all angles.
Diversification helps in reducing your overall level of volatility and potential risk, as when your investments in one area perform poorly, other investments in the portfolio can compensate for losses.
Hedging your investments across funds and AMCs
While investing, you need to take good care of allocation and rebalancing of your investments reasonably across different assets & funds, as you can’t give surety about market conditions all the time. Therefore, to not get over-dependent on any one fund, add diversified funds in your portfolios that are less likely correlated or negatively related to each other. This theory will make the management of funds easy & safeguard you from events & market downfall that injure any single organization.
You do have multiple objectives in mind from a growth perspective & hardly ever does a single equity fund cover all available opportunities. Hence, you need to include both large & small companies in your portfolio.
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Your equity Fund might not ally with the investment objective every time
Whilst there are multiple funds to select from, it is not definite that the one you choose always correlates with your investment objective. As uncertainties & challenges occur in front of companies, it’s very tough to maintain consistency in outstanding performance throughout market conditions & economy over multiple decades.
You might face difficulty in the form of varied faces including bad approaches, market downturns, and objective differences.
Upon consideration, these circumstances require you to apply for a model where you can consider investing in multiple equity funds that align with your plans & objectives.
With the changing era, you might feel like modifying your long-term & short-term objectives at different stages of investment. So, it’s always better to develop a portfolio of funds that gives you exposure to multiple sectors and sub-asset classes and satisfies your goals & values.
Takeaway
By now, you must have got ideas about why you need a portfolio of funds rather than just a single fund to invest in equity effectively. A well-diversified portfolio allows you to gain the highest return at the lowest risk.
When developing your portfolio, have a clear idea of your risk tolerance, budgeting & short-term and long-term investment goals. Choose investment opportunities using strategies that cover growth investing, income investing, or value investing.
