Why is Portfolio diversification important?
Portfolio diversification is a way of investing in different assets or securities to minimise the risk and develop a strong portfolio. Imagine investing all your money in a single security or asset. There is a probability that if the stock performance is good, this decision may prove profitable. But what happens if the stock market takes a U-turn? You will end up losing all your hard-earned money.
The Main Reason for Choosing Portfolio Diversification
To reduce the risk of losing money while making stock investments, it is advisable to look into portfolio diversification. By doing this, you can protect your investment from being uniformly affected due to any unexpected changes in the market events. You can also explore the option of thematic investing.
Ways to do Portfolio Diversification
Portfolio Diversification is an important rule to follow for making easy stock investments and risk management. Here is a strategy used to diversify your portfolio effectively:
Adopt SMART investing techniques to achieve long term financial gains
S – Safe (Bonds, Fixed Deposit, and Gold assets)
M – Market Linked (Mutual Funds, Exchange Traded Funds, International and Domestic Equity)
A – Alternative Investments (Private investments, or Real Estate)
R – Retirement Planning (Pension Funds and Provident Funds)
T – Tax Saving (Tax Planning, Insurance)
1.Spreading out your investments
Always spread your investments; never choose only one type of investment. Try to explore different plans like buying gold bonds, mutual funds, shares, or fixed deposits. It becomes quite risky if you put all your wealth in one investment plan. Any ups and downs that take place in that particular sector will have a direct impact on your stock performance. So to remain on the safer side, start by spreading your investments. There are different sectors available in the stock market, like aeronautics, pharmaceuticals, mining, consumer goods, energy, etc.
2.Exploring other investment avenues
You may consider assets and other investment options like mutual funds, bonds, pension plans, or investments in the real estate sector for portfolio diversification. But before making any decisions, proper research is required as market trends for each of the investments differ, and so do their risk levels. It will also protect you from losing all your money in one go.
3.Choose to invest in Bond Funds or Index
Adding bond funds or Index in your portfolio is kind of following a sound diversified strategy. It brings good stability to your financial life. Secondly, investing in bond funds or index funds is a cost-effective investment, and charges incurred in investing are also low compared to other investments. If you want to protect your portfolio from being affected by market volatilities, invest in the bond market for sure.
4.Keep updating your Portfolio
This is a significant part of your portfolio strategy. You need to keep updating your portfolio by making additions to valuable assets or securities. Keep investing in different classes of assets, debt instruments, equities, or instruments offering fixed returns. If you plan to invest in mutual funds, choosing a Systematic Investment Plan (SIP) route would be financially safer.
5.Invest in some Tax-Saving Schemes
Portfolio diversification is incomplete without investing in tax planning schemes. By doing this, you will not increase your income by saving tax and improving your ability to make investments. Look into investments like insurance schemes, Sukanya Samridhi Yojana, Atal Pension Yojana, NPS, and many other government schemes.
Benefits of Portfolio Diversification:
1.Minimise the risk of financial loss: If you choose to go with portfolio diversification, if the investment is not performing up to the expectations, others may perform well. It is a way to balance your financial life. Never put your concentration on one type of investment; explore varied nature like ETFs or Index Funds to be financially secured.
2.Capital Preservation: It is quite probable that every investor is not always at their growing stage. Some who are near to their retirement age are looking forward to ways to do capital preservation. At that time, portfolio diversification will help them in achieving that objective.
3.Chances of getting good returns on investments: It is not necessary that investments may perform in the same way as expected at the time of portfolio diversification. It avoids reliance on one source of income. There is a varied form of investments available, and some are even offering a fixed rate of return. Look into investments like mutual funds, systematic investment plans, or any tax saving plans.
Investing using the way of portfolio diversification is a tested way of getting a good return on your investment and at the same time minimising the risk factor of losing all the wealth in one go. Overall, portfolio diversification is a modern-day and smart method of getting a lucrative or promising return on the stock market’s investments.
Stoxbox offers people an easy way to diversify one’s portfolio using quantitative, fundamental, and research methods. We are equipped with highly experienced and qualified fund managers who will always be available to guide you in choosing the right and balanced mix of investment plans.
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