As I've stated at the very beginning of the course, one needs to have a diversified portfolio. Now, it is old saying that you should not put all your eggs in the same basket with money, it is definitely the case that you should not put all the money in the same instrument for investment. So we should have investment in commodities, real estate stock shares, bonds, derivatives, etc. Now, one of the instruments where we can invest is mutual funds, and it's a very important instrument to invest in. Now within the instrument of mutual fund also, we must diversify the portfolio. We have seen the mechanism how we can create a diversified portfolio within the mutual fund that we invest in.

Following different strategies, we created our sample portfolio containing 10 mutual funds. Now these mutual funds if you notice contain equity funds, debt funds, index funds, contra funds balance funds and arbitrage funds. Now also notice that the mutual funds are from different agencies. So, this is another level of diversification which is available here. So, there are different AMC from where we have taken the different funds, which we are planning to invest in. Again this is not a recommendation, this is just a sample.

We will see later how we can find the returns and risk what this portfolio presents. For now, we will consider another mathematical approach to identifying whether our fund our portfolio is diversified or not. On the Excel I have planted all our mutual funds. Also I have planted the figures of expected returns, standard deviation and the beta. I've kept a column for allocation issue which we will utilize later on. Now, I also found out the one year three year and five year returns for these mutual funds.

Ideally, we should get the data for a monthly basis. on a yearly basis and utilize it, but I am taking a shortcut here as it is just illustration and we have discussed all this in the part two of this course mastering mutual fund investments. Now, we find the correlation between the different mutual funds. So, we can use the current function of Excel. So, we can say quarrel between the first mutual fund returns and the second mutual fund returns. Now, I will anchor the first mutual fund So, that I can copy this formula down, we will soon see how this is this makes life easy.

So, there we have the correlation between fund a and fund B. I copy this across. So, now we have the correlation between fund a and b c d e f g h i j. We do the same thing for the other funds also. We find the correlation between Part B and C and so on. So, this will take a while. So, while we are calculating the correlation between the other funds, let us have a look at some of the correlations that has been calculated so far.

I notice here there are some correlations which are very close to one that means, these mutual funds are very highly correlated, while there are some correlations which are in point three zero or point four seven etc that means these mutual funds are not very well correlated. If the mutual funds are not very highly correlated, that means, this is a good diversification that we have managed to create You can see here as we have 10 mutual funds, we are having to make so many calculations. Now ideally you should have a mutual fund portfolio of 30 mutual funds and then the calculation becomes extremely complex and tedious. So, usually it is better to use a tool like Excel or create a program using some programming language for handling all these activities. Now we're nearly done. Okay, so now we have calculated all the correlations.

Now let's have a look at some of the correlations. Just notice here a BF etc not very highly correlated fund ABCD are quite highly correlated. There are some funds which are absolutely correlated, for example, C and G or C and H. So now we have seen how to create a diversified portfolio and we've also seen a mechanism how we can test whether the portfolio is really diversified or now with this we come to the end of this section. Thank you for watching. See you in the next section.