With the uncertainty in the global markets revolving around geopolitical tensions, interest rate hikes, inflation, and rising oil prices, all investors are looking for various ways to diversify their portfolios. At any point, investing heavily in only one asset class or one type of security is risky. But in times of expected volatility, it is even more important to diversify. Hence, you may hear many mutual fund investors talking about buying the “entire market”. What does this mean and how should you do it? Let’s find out.
Mutual fund diversification: How to buy the “entire market”
Mutual fund investments in themselves are a great tool to add a layer of diversification to your portfolio. There are several types of mutual funds, and you can use them in a strategic way to further diversify or buy the “entire market”. Here’s how:
- Invest in index mutual funds
Index funds follow a passive investment strategy. Here, the mutual fund portfolio is built according to a market index that the fund aims to track. The aim is to mimic the returns of a benchmark index that covers a broader section of the stock market. The cost involved here is also lower as there is no active stock-picking or analysis required. When you invest in index mutual funds such as a Nifty 50 index fund, you are essentially investing in the entire market. In the long term, the broader market will always outperform any one investment instrument and hence investors look at adding index funds to their portfolios.
- Invest in international funds
Another way to diversify using mutual funds and buy the entire market is by investing in international mutual funds. Historically it is seen that stock markets of different countries do not move in tandem. For instance, the US stock market has a low correlation with the Indian stock market. What this means is that the same micro and macro-economic factors do not tend to impact these stock markets in the same way or with the same intensity. Hence, using international funds to diversify across geographies can be a smart investment move. Another benefit of investing in funds such as feeder funds is that rupee depreciation tends to increase your returns. This is because a feeder fund collects the money in INR, converts it into USD for investing and at the time of redemption, the money is converted back into INR.
The bottom line
By investing in different types of mutual funds such as index funds and international funds, you can diversify in a more comprehensive way. This allows you to reduce your portfolio risk at multiple levels. For instance, if the Indian stock markets take a hit, your returns from international funds could absorb that shock. It’s important to look at your current asset allocation before you make mutual fund investments. Also, remember to consider your risk tolerance and financial goals when diversifying.