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To earn bigger returns, investors often make the mistake of investing all of their money in the best performing fund. This brings in concentration risk. That is, if the fund fails, he is at the risk of losing all his money. 

The better way to do it is by diversifying your investments. That is, he should allocate his investments  in different asset classes like stocks, bond, gold etc.

“This way, even if a portion of portfolio is not moving or in loss, the rest of your portfolio can compensate this loss or at least not declining as much hence, reduces the overall risk," said Paritosh Sharma, Co founder at Psquare corporate advisors llp. 

Although, number of funds depends on the risk appetite or other factors but a basic mutual fund portfolio could be of these 3 funds - 1 each in debt and equity mutual fund category and one in passive investing category, Sharma suggested, and that way, he can pick Parag Parikh flexi cap fund, ICICI Prudential Ultra Short term fund, and UTI Nifty Index fund.   

For a better understanding, let's delve a look at the returns to understand why Sharma suggested a combination of these three funds for a bare minimum portfolio.  

Let's suppose, Investor A has the capacity to invest 15,000 every month and he decides to invest this money equally in three funds for 5 years. 

Parag Parikh flexi cap fund: Over the last 5 years, the fund has given an absolute return of 57.64%, i.e. 11.5% per year on an average. The Morning Star rates this fund as 5 star. 

 For a 5,000 SIP for 5 years, he would earn 4.06 lakh

ICICI Prudential Ultra Short term fund: Rated as a 5 star fund by the Morning Star, this fund gave an absolute return of 22% in the last 5 years, i.e. an average return of 4.4%. 

For a 5,000 SIP for 5 years, he would earn 3.34 lakh

UTI Nifty Index fund: This fund gave an absolute return of 55.9% in 5 years, i.e. 11.18% per year on an average. Again, this is another 5 star rated fund by Morning Star. 

For a 5,000 SIP for 5 years, he would earn 4.03 lakh.

In total, Investor A earned 11. 43 lakh in 5 years. 

 

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