PORTFOLIO DIVERSIFICATION Definition
There is a very famous saying that is says “Do not put all eggs in one basket.” This piece of advice is very useful specially while investing in the financial markets. Obviously investing is a best practice, but putting all your savings in one investment could be risky because chances of loss are also there as the investment depends on market fluctuation.
The concept of asset allocation and diversification has been introduced for the investors so that they can diversify their investments in different industries, financial products etc. It is true that diversifying does not prevent risk but it will surely lower down the level of risk.
DIVERSIFY YOUR PORTFOLIO
A disciplined and regular investment from an early age is the best way to let your money grow. Therefore, an investor needs to diversify the portfolio right from the start so that risk is minimized. When an investor starts investing, he is raw and young and therefore he becomes more disciplined with time.
If an investor wants to invest in stocks, he may choose different industries such as pharma, automobiles, telecom etc. but still the investments remain in stocks only, so the diversification means investments in different financial products. It is important to diversify in stocks, but more important is to diversify in different classes of products.
Stocks– This is also known as equity, if an investor purchase a equity share of the company, the person becomes the shareholder and a owner of the pubic listed company. This equity stocks could be a little risky as the price changes with the fluctuations in the market and the news around. But at the same time it may be safe as all the transactions are being monitored by SEBI.
Bonds– These are the low-risk investments, suitable for persons who are risk averse and give the investors a stable income. As a famous saying says lower the risk lower may be the returns, so be cautious while investing in bonds. Government bonds be the safest one.
Mutual Funds– It is a baggage of equity, bonds, debt all in one or separate. It offers different kinds of Mutual funds for an investor. Such as, if an investor is having less income he may invest through SIP’S, under this scheme fixed amount of income is invested at a fixed interval. A young investor could start with SIP’s but remember the key of investment, diversify in different industries and formats.
Foreign or Global Markets– Foreign markets give higher returns in small intervals. As a new investor, it may take sometime to understand the fluctuations, trends and functioning of foreign markets.
But these markets may be highly rewarding at some point of time, when Indian markets show a downturn.
Gold and Real Estate- Digital gold is the new bling in this current scenario, invest some amount in gold as it is one of the most preferred investment in India. Real estate as well could give higher returns to the clients, also the property could be used to earn rental incomes.
TIPS FOR DIVERSIFYING PORTFOLIO
By now it must be easily understandable why is portfolio diversification important and crucial in an investor’s life. It is the investors hard earned money that he invests and that is why he want it to be safe and secure with higher returns to meet his financial goals.
- Buy hold strategy-
For a long term investment an investor needs to buy and then hold the investments for a longer period of time. A constant trading strategy will not work. Allow investments to grow so that it could be used when required. If you are investing to make money fast you will surely lose it.
- Variety of assets in portfolio-
An investor should invest in different small caps, large caps, bonds that ways an investor is more secured in the market.
- Manageable portfolio-
Make sure as an investor you have a manageable portfolio. Do not spread your wings too far, that liquid fund is not available with you. Always keep some liquid fund for a better standard of living.
- When to Exit-
This is the most important step as an investor, one must know when is the right time to exit an investment, so that the losses are cut and the investor is in a stable position.
- Portion of portfolio in fixed income-
No matter how much risk you can take, it is always advisable to also invest in products that offer fixed returns. Such investment will reduce overall risk and volatility of an investor’s portfolio.
Investment does not involve any emotional attachment, an investor may use the above products and tips to create their portfolio. The true meaning of investment is reaping returns and let your money grow, so if it does not happen with an investor then it is of no use to invest. A diversified portfolio should a mixture of various investments that will depend on individual how risk averse he is and how much is invested in capital or fixed income stocks.
So, pull up your socks, write down your goals and diversify your portfolio with various investment to meet each of the goal. Plan a portfolio that is easy to maintain, if required take help of financial planners and advisors. A diversified portfolio right from the start gives a sense of discipline, financial freedom and improves the quality life.