Smart Strategies Offered By Mutual Funds

By Author: ICICIPRUAMC
Total Articles: 8
Comment this article

It's not without reason that variety is said to be the spice of life. Take food for example. To maintain a healthy diet, you need to consume a variety of food that provides you carbohydrates, proteins, fats, minerals, etc.

Well, the same applies to investing too! Your investment portfolio should have a mix of assets (equity, debt, property, etc.) simply because each of them has its own particular characteristics and hence, a specific role in your portfolio.

Now, let’s go back to food. Some people may need a bit more protein while others may need an extra tinge of vitamins for their particular body requirements. Similarly, you need to have the right proportion of different assets in your portfolio to suit your financial goals and risk appetite. In financial jargon, this is called asset allocation. For example, a retired person may need a regular and steady income flow, and would therefore need to be invested predominantly in debt with a minor exposure to equity. But a person in their twenties may have a predominantly equity portfolio, in line with their risk profile and investment horizon.

Asset allocation ...
... cannot be a one-time exercise. To understand this better, consider the following example. On 1st January, you work out your asset allocation as 60% in equity and 40% in debt. Now, with time, your needs and risk profile will change. Also, your equity and debt investments will not offer the same returns. This means you will need to review your asset allocation periodically (it’s preferable to do this once in six months).

So, how do you rework your investment portfolio to rebalance your asset allocation? Simple, you can either move some money from one asset to another or make fresh investments in the asset that you want to increase in your investment portfolio.

Though this exercise may sound difficult, mutual funds offer some systematic solutions that could make your life easier.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

This article should not be considered as 'investment advice'. We request the Reader to make informed investment decisions and consult their financial advisors to determine the financial implications with respect to investing in Mutual Funds.