Diversification reduces risk by allocating investments across financial instruments
19-Sep-2013 •Research Desk
I have built a good equity fund portfolio. I want to invest in a debt fund for diversification. Should I invest in IDFC GSF Investment Regular or Birla Sun Life Medium Term fund? -Tapas
Diversification reduces risk by investing across assets and categories. If a particular company or sector is in problem, having a limited exposure to it helps.
IDFC GSF Investment Fund is a gilt fund that invests in medium to long-term government securities. These schemes don't carry any credit risk, but the investments can turn risky because of the frequency with which government securities are traded.
The value of underlying securities changes with change in interest rates, and this in turn reflects in the changing value of the fund and it's NAV. For this reason, gilt funds are highly sensitive to interest rate movements. These funds should be used opportunistically and the best time to invest in them is when interest rates are at peak while one should move out before the rates dip. The falling rates appreciate prices of long-term bonds and other government securities.
Birla Sun Life Medium Term is a good fund with a five-star rating. It invests in securities with maturity ranging between one and five years. Medium to long-term funds are likely to do well over long-term because they tend to be more volatile during short-term. Therefore, if your investment horizon is for long-term you can invest in the fund.