We enumerate the best options in mutual funds to offer diversification and stave off risk.
Investing in mutual funds is par for the course for many an investor looking for good returns over time. If you are looking for good mutual fund options for this year, you can consider adopting a suitable strategy and good funds to suit it.
Strategy #1: Diversification within the asset class
This strategy is also known as 'horizontal diversification'. Using this strategy, you can build your portfolio within one asset class, such as equity, debt, real estate, gold, etc. The risk is spread quite a bit with this strategy, and your investment is also spread across different securities in that asset class. For example, you can split your investment across gold, by buying physical gold, or investing in gold mutual funds of varying periods. When investing in equity, you can go for a combination of large cap and mid cap funds. You can also explore the 'negative correlation' option among asset classes. For example, you can include equity with debt and gold, where overall risk is reduced while the portfolio becomes more diverse.
Strategy #2: Diversification against the asset class
This strategy is known as 'vertical diversification', where you invest in different asset classes. This strategy is normally adopted to gain higher returns across a spectrum of assets, and also absorb the associated risks. Using this strategy, you could invest in equity funds as well as fixed income, EPF, PPF, fixed deposit, etc. This strategy helps mitigate risk to a large extent - if one asset class performs poorly, the others absorb the losses and keep your earnings stable.
You can discuss your options and financial goals with an experienced fund manager, to adopt the most suitable strategy and gain the maximum returns on your investment.
The best mutual funds to build your portfolio
* Gold mutual funds: The gold mutual funds are designed to generate returns like gold ETFs, with a low holding cost and zero transaction costs on buying and selling. You can start an SIP on the gold mutual fund for as little as Rs 1,000. Leading fund houses do not insist on you open a demat account for this fund.
* ELSS: The Equity Linked Savings Scheme is a mutual fund that most investors make a beeline for when trying to save tax every year. It has one of the smallest lock-in periods across MFs (just three years) and it promises high returns when you stay invested in it for a long time.
* ULIPs: With the dual benefit of life insurance with market-linked returns, ULIPs offer stability and protection over a longer period of time. You have the flexibility to allocate different units if you feel that the existing ones are not performing as per expectation.
* Equity-oriented hybrid funds: These mutual funds offer high liquidity and high returns as well. The best performers in the market offer returns from 14% to 16% for long term investments. However, they attract LTCG (Long Term Capital Gains) tax for income over Rs 1,00,000.