46) Why You Should Diversify Into Different Fund Types?

46) Why You Should Diversify Into Different Fund Types?

There is an old saying,

“Not to all put all the eggs in one basket.”

It applies very well in Investments.

So, we were advised to put the eggs into a few types of baskets. This is what portfolio diversification is basically about. You diversify your portfolio to spread the risks.

In the volatile market, the return and risks of investment fund types are always changing. Some investment fund types gave positive returns, while at the same time others gave negative returns.  In another time, the investments that did well previously, started to lose.

With Unit Trusts Investment, you can invest into 3 main types of fund types:

a)      Money Market

b)      Bond

c)      Equity

Let’s look at the sample performance of the different asset classes for the last 10 years.

You will notice that Money Market fund (Green) is the most stable. The performance return is almost an upward sloping line.

The Bond fund (Blue) is a little more volatile, Although still sloping upwards, there are times of minor fluctuations. Bond funds are also categorized under Fixed Income funds. This is because the bonds receive regular fixed income over the investment period.

The Equity fund (Orange) is the most volatile. The fluctuations up and down are very common and with large differences. Notice the large drops in 2008 and 2011 during the Financial Crisis.

Notice that at certain periods, the different funds graphs moved in different directions. It is obvious in the equity fund. If you had put all your investments into the equity fund at that period, you may have losses. The bond fund could have provided some “cushion” for the losses. If you had to redeem your equity fund investments at that time, it would have meant that you made losses.

By putting part of your investments (or diversify) into bond fund, you reduce your overall portfolio risk. Some are in the stock market, while some are in the fixed income category. Money Market funds are more suitable for short term investments.

Another benefit is that the bond fund also creates “ready money” to invest during stock market crashes. You will have money to buy into equity funds at a cheaper price.

Please be reminded and be aware that all investments carry risk. Do consult your professional investment and financial consultants.

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