Mutual Funds offers benefits of Diversification
It is a well-known fact that one way of ensuring safe investments is to spread them out or over various instruments, securities, asset classes, locations and so on. In proverbial terms: Don’t put all your eggs in one basket!
Mutual Funds, by virtue of their structure, offer investors precisely this benefit of diversification. For instance, take Equity Growth Funds where the fund invests the money collected in shares of various companies.
The advantage? Say, some of the scrips turn out to be poor investment decisions. The impact of this will not be disastrous simply because the better investment decisions will balance it out and bring in returns rather than losses. Similarly, a Bond Funds spread of investment over fixed income instruments of various kinds and from various issuers ensures that if there is a default in interest and principal on one or two of the instruments, the overall wealth of the investor doesn’t take a beating.
All mutual funds invest across a spectrum of instruments, though the extent of diversification varies depending on what the investment objective of a particular fund is. While General Equity Funds with no sector specifications have a high diversification level, Sector Funds can only diversify across the securities available in the sector specified. Whatever the case, as long as you are aware of why and how diversification helps, you can opt for Mutual Funds for all the right reasons.
He has authored several analytical articles on personal finance in The Times of India and The Economic Times. Being a finance geek and having been involved with internet since the early days of the medium, he was a great help and source of guidance while formulating personalmoney.in. You can know more about Manish at ManishMisra.com
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