From Risk To Reward: 5 Tips To Build A Diversified Mutual Fund Portfolio

Mutual funds are a popular choice if you’re looking to grow your wealth. More people are choosing mutual funds over traditional options, with SIPs leading the way. This trend is highlighted by Moneymood 2025, a BankBazaar report on personal finance trends, which found that 62 per cent of those surveyed prefer mutual funds.  

But, as market-linked investments, mutual funds carry risks. Diversification is a simple, yet effective strategy that involves spreading your money across different mutual funds to balance overall risk– especially if one fund underperforms. To build a strong yet balanced portfolio, understanding diversification can be a powerful tool. Here are five tips to help you do that. 

Diverse doesn’t just mean different

Many first-time investors think they have diversified just because they own multiple funds. But if those funds hold similar assets, the risk stays the same. True diversification means spreading your money across different categories and sectors. For instance, investing in four mutual funds that buy the same large companies is not diversifying. Instead, consider a mix of asset classes (equity, debt, gold) and sub-categories like large-cap, mid-cap, and sectoral funds.  

Don’t put all your money in at once

Market dips often tempt investors to invest in a lump sum. But, it’s hard to know when the market has hit its lowest, and prices can fall further due to unexpected events. A better approach is to invest steadily through Systematic Investment Plans (SIPs). This spreads your investment over time, providing the benefit of Rupee Cost Averaging and reducing the risk of mistiming the market.

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Plan your investment allocation carefully

Asset allocation is how you divide your money across investments like equity and debt. It’s crucial for balancing risk and return, ensuring your portfolio is aligned with your financial goals—whether that’s long-term growth or steady income. Here is an example–Invest Rs 1 lakh by splitting into Rs 40,000 in large-cap equity, Rs 25,000 in mid-cap or flexi-cap funds, Rs 25,000 in short-term debt funds, and Rs 10,000 in gold– for a mix of asset classes and sectors.  

Watch for stock overlap

Portfolio overlap happens when different funds you invest in hold many of the same stocks. For example, two funds may list the same companies among their top holdings, reducing the benefits of diversification. To avoid this, review your fund portfolios, mix investment styles, and use online tools to check for overlap. This ensures your investments are better diversified and aligned with your goals. 

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Choose funds from different AMCs

An Asset Management Company (AMC) manages mutual funds on behalf of investors. They create schemes with specific strategies, so even similar-sounding funds from different AMCs can have different approaches and risks. For example, one AMC may offer a value-focused equity fund while another has a growth-oriented one. Comparing funds across AMCs offers the benefit of varied investment styles, fund managers, and a wider range of holdings, reducing overlap and risks. 

Mutual funds are a smart way to grow your money, but investing wisely makes all the difference. Diversifying across different fund types, asset classes, and AMCs can lower your overall risk and bring more stable returns. Planning your investment can go a long way in helping you build a strong and balanced portfolio for the long term.

(The author is the Senior Manager-Communications at BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar)