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3 Ways to Diversify your Portfolio using Mutual Funds

1. The fund-of-funds route
A fund-of-fund is a single scheme that enables you to invest across different types of mutual fund schemes.

Suppose you want to have 60:40 equity-debt asset allocation. Then, you can choose a fund-of-fund scheme that invests 60% corpus in 'equity funds' and 40% in 'debt funds'. Thus, herein with investment in just one fund, you can get the desired asset allocation. Also, this fund-of-fund route is highly tax-efficient at the time of portfolio rebalancing.

Though easy to understand, tax-efficient and simple to operate, it is not a very flexible approach. Also the costs may be slightly higher. Secondly, as on date most fund houses invest in their own schemes. So you can't get the fund-house diversification.

2. The hybrid MFs route
To make the portfolio more suited to your needs and invest across different fund houses, you can go for hybrid schemes such as MIP or Balanced type of mutual funds.

Herein the corpus gets invested in individual stocks, bonds and/or gold based on the allocation percentage. You could, for example, invest in a balanced fund where 60-65% of the corpus gets invested in individual stocks and the balance 35-40% in different bonds. Or a fund that invests 50% in shares, 25% in bonds and 25% in gold.

Under this approach, you have more flexibility than a single fund-of-funds scheme. Also the overall expenses will usually be lower. But, depending on the exact mix, it may not be as tax efficient as a fund-of-funds scheme. Moreover, you have to separately choose and manage more number of funds.

3. The dedicated MFs route
One step further would be to choose different dedicated equity, debt and gold funds.

The benefit, of course, is higher degree of flexibility to construct a portfolio more in line with your needs. By choosing different funds covering different sectors in the market, you can achieve a high level of diversification across entire market – both debt & equity.

But the drawback is further increase in the number of individual funds you need to invest in and manage. Also, at the time of portfolio rebalancing, you could end-up with a higher tax outgo vis-à-vis the aforesaid first two routes.


Given these various routes available, you have to opt for one that suits you the most from the perspective of time, knowledge and efforts that you can put in managing your money.

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