Think twice before following the funds rush

With equity markets looking strong this year there's plenty of temptation to jump onto some of the trades with the most momentum. There are certainly enough options out there: many of the Magnificent Seven stocks have posted handsome returns so far this year, niche markets such as India have been doing well and even the FTSE 100 is enjoying a rich run of form. But, as ever, investors might want to avoid getting too carried away.

Higher bond yields created huge opportunities for income investors last year, provided they didn't pile too heavily into that asset class at the expense of capital and dividend growth over time.

They certainly have moved into bonds (both directly and via funds) in the past year or so to capture the yields on offer, but there are some small signs of that reversing. Hargreaves Lansdown notes that all of the 10 most popular funds amongst its Isa customers in May were equity vehicles, with the likes of US and global trackers topping the charts alongside Jupiter India (GB00B4TZHH95) and Artemis Global Income (GB00B5N99561).

What's going on here? Hargreaves, for one, attributes this to the various causes we have for optimism. Recessionary fears seem to have receded, interest rates should have peaked even if cuts are coming less soon than once expected and markets, as mentioned, are enjoying some big gains.

Investors will want to bank those wins while they can, whether it's by buying the hottest stocks or even the likes of a tracker fund. But they need to not get carried away and sacrifice portfolio diversification for the sake of chasing winners.

What does this mean in practice? For one, investors can still take advantage of high bond yields while the opportunity is still there, and they should stick to an asset allocation that suits their level of risk.

If equity allocations are growing substantially in a portfolio thanks to big recent gains, it can make sense to rebalance to the original preferred levels (effectively by taking gains on some winning positions and putting more money into struggling ones).

Looking across the platform space, data from Interactive Investor does show its customers following a similar trend in May, with trackers (such as Vanguard's LifeStrategy offerings) among the top 10 most popular open-ended funds alongside Jupiter India and investor favourite Fundsmith Equity (GB00B41YBW71).

Both Hargreaves and Interactive customers also have a penchant for technology-focused passive funds. A money market fund, which buys short-dated bonds and offers a decent yield, does still remain popular on Interactive, however.

Interactive also breaks out the most popular investment trusts among its customers and, alongside some stalwart equity vehicles such as Alliance Trust (ATST), Scottish Mortgage (SMT) and City of London (CTY), we do see some investors dipping into the infrastructure space via funds such as NextEnergy Solar (NESF) and Gore Street Energy Storage (GSF).

There are certainly bargains to be found here, although investors would do well to remember the correlation such assets can have to bonds in case things do again get rocky for the fixed income market. The boring mantra of 'diversify' remains an essential one, even if it lacks the glamour of some of the big trades currently doing the rounds.