–Arun Thakur
Many mutual fund investors, especially new ones, believe that investing across every possible mutual fund categories will help them to maximise returns and achieve optimal diversification. This is not right. Investing a small sum in too many schemes are unlikely to offer the benefits of diversification or maximise returns. In fact, it often leads to over diversification and drag returns down.
This is why we always ask investors to choose mutual fund schemes based on their goals, horizon, and risk profile. For example, if you are a conservative investor looking to invest to create a corpus to take care of a long-tem goal, you can invest in large cap mutual funds. If you have a moderate risk profile, you may choose flexi cap mutual funds. We do not recommend high-risk categories like mid cap and small cap funds to new investors. Sector schemes are not recommended to new investors as they will find it difficult to time the entry and exit in these schemes. It is extremely critical to enter and exit these schemes at the right time to maximise return. Sectors always move in cycles and they can get into long bear phases. Many investors will find it difficult to handle.
