4 Investment Techniques You Should Follow While Investing In Multiple Schemes Of The Same Mutual Fund Category

• Diversification of your investment portfolio can provide optimum returns and hedge your risk.
• Many investors invest in similar schemes belonging to the same fund categories (large, mid, and small-cap) of different fund houses (Mirae, Axis, SBI, ICICI Prudential, and others) as an investment strategy.
• Most schemes in the same category have around 70% overlap. In that case, you don't get the desired results of your diversification.
• You may expect similar returns if two schemes in the same fund category overlap over 50-60%.
• As an effective investment strategy, you may invest in one passive index fund to get large-cap exposure.
• When investing in mid-cap mutual funds, limit your investment to just one or two schemes.
• Invest in two to three small-cap mutual fund schemes to optimise diversification.

Are you a retail investor in the mutual fund market? If yes, please read these common mistakes made while diversifying funds in different schemes. In this article, you'll learn how to rectify these common fund diversification mistakes and optimise your investment strategy. Also, learn the best investment techniques to help you get an optimum return by balancing your risk.

Diversification Of Funds: What Does That Mean?

Diversification is the most important thing when creating a mutual fund investment portfolio. What does diversification mean?

Sectoral Diversification

Investment diversification means investing your funds in different kinds of stocks belonging to a wide range of sectors. When you adopt such a strategy, you hedge your risk of overexposure of your funds in a single industry.

Example:

Let's try to understand it with the help of an example. Suppose you've invested all your funds in a mutual fund, mainly IT stocks. During covid times, you could have got exceptionally high returns. However, if you are still invested in the same, your portfolio value has nose-dived as the IT stocks are witnessing a bloodbath.

To avoid such a scenario, you should diversify your investment in mutual funds in various sectors (IT, Banking, Infrastructure, Pharmaceuticals, and many more).

Diversification As Per Market Capitalisation

Stocks can be diversified as per their market cap. There are three categories:

• Large Cap: They usually consist of blue chip stocks (whose market cap is more than Rs. 20,000 crores), including Infosys, SBI, etc.)
• Mid Cap: Major mid-cap stocks (whose market cap is between Rs. 5,000 and Rs. 20,000 crores) in India are IDFC First Bank Limited, Aditya Birla Capital, Bharat Forge, Abbott India, Shriram Finance, and many more.
• Small Cap: This category comprises listed companies with less than Rs 5,000 crore market capitalisation. Some examples of small-cap funds in India are Gujarat Narmada Valley, Bharat Dynamics, Aegis Logistics, UTI Asset Management, 3i Infotech, Kajaria Ceramics, etc.

Also Read: How To Diversify Your Equity Portfolio?

Diversification In Mutual Funds

• You can create a well-diversified portfolio by investing in stocks across stocks belonging to various industries, sectors, and market capitalisation.
• If investing in mutual funds, you should diversify your investment among various fund houses. This is because different fund managers use other investment techniques to optimise returns.
• You may also keep active and passive funds in your investment portfolio.
  • You may choose passive funds if you want fund exposure in large-cap funds.
  • You may use active funds if you are willing to take additional risks. They will provide you with adequate exposure to both small-cap and mid-cap stocks.

Also Read Diversified Vs. Focused Mutual Funds

Most Common Fund Diversification Mistakes We Make During Mutual Fund Investing

While diversifying our funds, we generally make some common mistakes. For example, we tend to invest in multiple mutual fund schemes belonging to the same category of fund (say, small cap, mid cap, and large cap). But what's wrong with it? Let's explain.

Suppose you are investing in multiple large-cap funds:

• Mirae Asset Large Cap Fund
• Axis Bluechip Fund
• SBI Bluechip Fund
• ICICI Prudential

These large-cap funds overlap 68% to 78% among them. This means the returns provided by these schemes in the same large-cap category will provide you with similar returns.

This means you'll not get any diversification benefit if you invest in all these four mutual fund schemes in the same fund category.

How To Optimise Your Mutual Fund Investment Strategy of Diversification?

It would help if you tried to gain exposure in mutual fund schemes belonging to different sectors and market capitalisation for optimum diversification. Here are the four most crucial investment techniques you may adopt:

Large Cap Exposure

• You can invest in a passive index fund to provide large-cap exposure to your portfolio. Invest in only one fund.
• You may also invest in a flexi-cap fund with a significant cap orientation if you are a moderately aggressive investor having a smaller portfolio.

Mid Cap Exposure

Investment Strategy #1

If you want exposure in mid-cap category funds or significant/flexi-cap funds, you may invest in more than one mutual fund scheme. However, always make sure to keep these things in mind:

• Make style diversification
• Keep overlapping/correlation among schemes to the minimum (significantly below 50%)

Investment Strategy #2

You can invest in one to two mid-cap-oriented schemes. In such a case, try to invest in the following:

• Pure passive fund
• Passive-based-factor-fund

Small Cap Exposure

Always go for active routes while investing in small-cap funds. You may invest in two to three small-cap mutual fund schemes if you have an extensive portfolio.

By following these investment techniques, you can get a balanced diversification among sectors, stocks, market capitalisation, styles of fund manager investment, and AMC.

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.