Mutual fund investments have successfully found their way into the portfolio of several retail investors for a large number of benefits it offers to investors. Hassle-free investment, potential to earn substantial returns, tax benefits, professional management, etc. are just some of the benefits of mutual fund investments. But are they entirely risk free? Different mutual fund schemes carry different levels of risk. However, to answer the question – No. All types of investments carry some level of risk. Now, the question arises, is there any way to reduce the risk your investment portfolio is exposed to? Let’s explore the same.
Mantras to reduce mutual fund risk
Following are a few tried and tested mantras and techniques that can help you reduce mutual fund risk on your investments:
- Diversify your investment portfolio
Diversification is the key to reduce the risk your investments are exposed to in a seamless manner. Diversification helps to reduce the risk of loss of investment arising from any one type of asset class. Mutual fund investments are one of the easiest ways to diversify your investment portfolio without holding in-depth knowledge of any particular type of asset class. However, one must be aware that different types of mutual funds offer different levels of diversification. - Avoiding overlapping of mutual fund schemes
Even if your mutual fund investments are channeled through different fund houses, there are chances that an investor might overlap sectors or themes. The overlapping of mutual fund schemes might result in the concentration of a particular sector or theme which might further make an investor lose out on investment opportunities. Therefore, it is important that you choose mutual fund schemes basis your financial objectives. - STP for lumpsum investment
If you have a substantial sum of money lying around, you might consider making a lumpsum investment. Systematic transfer plans or STP might be an ideal mode of investment to make a lumpsum investment. STP investment allows investors to transfer their funds from one mutual fund scheme to another belonging to the same fund house. This staggered and systematic transfer of funds is recommended as it offers investors with the benefit of rupee cost averaging. - Make sure to periodically monitor and review your mutual fund investments
Periodic monitoring and reviewing of your investments is quite essential in keeping a track of your progress and performance of your mutual fund schemes. This will help you to filter out the investments that are not serving your investment portfolio anymore. Hence, an investor is advised to monitor their investments on a regular basis. You can consider checking the performance of your scheme against the underlying benchmark or other peer funds belonging in the same category. - Consult your financial advisor
Investing has become quite seamless these days. With the advancement of technology, you can now invest in mutual funds online from the comfort of your home. If you are still need with the investment decisions for your portfolio, you can consult a financial advisor who can help you with your investment-related decisions.
