Are Mutual Funds Enough For Portfolio Diversification?

You may think that by investing in various MFs you are adequately diversified, is it so? DSIJ explains what are the different asset classes and how can you diversify your portfolio in the true sense.

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More and more investors have become increasingly aware of investments in mutual funds in the last few years and have increased their MF investments. However, the recent decline in the equity markets and paper downgrades in the debt markets have led many retail investors to redeem their mutual fund investments. The situation becomes scarier in the case of investors who have invested in direct plans, where the rate of redemption is higher than the regular plans. This is the first serious decline in MF investments witnessed by many investors who started investing after 2013, which shows the level of confidence investors have in mutual funds. But the problem starts with the MFDs (Mutual Fund Distributors) or, for that matter, anyone who is selling mutual funds to the investors. They try to convince their clients that mutual fund investments are one of the safest options as compared to other asset classes. Here lies the gap between the perception and the reality. First of all, investors should understand that mutual funds are in no way a safe investment, at least not as safe as your savings bank account or bank FDs (fixed deposits). Any MF investment does carry some amount of risk with it. If you are expecting great inflation-adjusted returns from mutual funds, then you should be ready to inherit a great amount of risk by default.