Tips for Diversifying Your Investments

A diversified investment portfolio provides the best balance for your saving plan and prevents your investments from any financial disruption by. A diversified portfolio helps in minimizing the risks while investing for the long-term. best financial advisor in Lucknow

Starting a regular investment from an early age is the best way to earn great return. Invest your money in different sectors, plans and tenures. For instance, do not invest all your money in one sector for e.g.:- pharmaceuticals sector, even if it the best-performing sectors during the Covid-19 pandemic. Diversify in other sectors too, such as education or IT sector. You can start investing in SIP, stocks, bonds, or government securities. Once you are confident in your investment decisions and have sufficient capital, than you can invest further into other sectors like global markets, foreign exchange and real estate.

Here, we discuss some of the best ways in which you can diversify your investments:-

Asset Allocation

Asset Allocation is the most popular form of diversification. Asset allocation is based on age and lifestyle. You can take a risk on your portfolio at young age by opting for stocks that offer high returns. But if you are not starting at early age than there are two basic types of investment options– stocks and bonds. Investing in bonds is more suitable while stocks are seen as high-risk. To minimize risk exposure, one should always divide money between these two options.

Protect your portfolio from losing the investment value by investing into different investment classes in your portfolio including stocks, bonds, cash, real estate, gold, or other commodities you can. When stock prices fall, bond prices often rise because investors move their money into what is considered a less risky investment. Therefore, a portfolio that included stocks and bonds would perform better than one that included only stocks at the time when a stock market drop. While it's true your portfolio would not rise as quickly as it would with all stocks, but bonds protect you from a massive loss.

Assess the stock qualitative risks before investing 

Apply qualitative risk analysis to assess the stock transaction before buying or selling a stock to minimize the risk. A qualitative risk analysis is a pre-defined rating that helps to determine a project’s success. Evaluate the stock through specific parameters that will indicate its stability. These parameters will include:-

·         A robust business model

·         Integrity of senior management

·         Corporate governance

·         Brand value

·         Compliance with regulations

·         Effective risk management practices

Invest in money market securities for ease of liquidation

Money markets securities plan include certificates of deposit (CDs), commercial papers (CPs), and treasury bills (T-bills). Ease of liquidation is the biggest advantage of these money market securities is the ease of liquidation. The lower risk makes it a safe investment. 

T-bills are the closest to risk-free securities from all market securities. They are known for safety not for high return. Issued by the banking regulator the Reserve Bank of India, these government securities are backed by the central government. They provide a secure and ideal option for short-term investments. 

Invest in bonds with systematic cash flows 

Mutual funds investment is seen as a reliable and stable option. Consider systematic withdrawal plan (SWP), if you want to access your money even as it is locked in a savings plan. In this, investor can withdraw a fixed amount monthly or quarterly from his investment amount.

Similarly, STP is an alternative of SWP. STP is a systematic transfer plan where you can transfer a fixed amount of money between different mutual funds. STP maintains a balance in your investment portfolio and provides access to your investments at a fixed interval. 

Understand factors that impact the financial markets

Before investing in financial market (including stock exchanges, foreign exchanges, money markets, bond markets and other) understand the factors that influence financial movement. These are essentially a marketplace for financial instruments and, like other market; they also work on demand and supply principle. 

Try a systematic investment plan (SIP) scheme

SIP is the best option if you want to invest a small amount over a given time rather than investing a huge amount at one time. Under this scheme, one can invest a fixed amount in mutual funds at fixed intervals like for 5 or 10 years or for more. This is best investment plan for those who do not access to a large amount, but can afford to invest only a small sum each month. You can start a SIP with INR 200.

SIPs help you inculcate discipline in your investment strategy and it is ideal for young investors. The SIP gets deducted directly from your bank account on the given date, getting you used to it and keeping aside a fixed amount regularly, for your future.

Fund Variety

Many investors diversify by buying variety of funds. You can complement that index fund with a few different ones of varying risk levels. These could include funds that:

·         Purchase shares in overseas companies

·         Consist shares of small companies

·         Invest in bonds

·         Buy shares in REITs real estate investment trusts

Each fund types perform differently under different market conditions. When you diversify your investments across variety of funds, you make it more likely that you always have some stocks performing well at any given time. And by diversifying your portfolio you will grow your money.

The Bottom Line

Investing means giving your money the opportunity to grow and help you work towards your other life goals. A best financial advisor in Lucknow can help you select best mutual fund plan that fit your desired risk and diversification level. The earlier you start investing, the more time you can give your investments to reach their potential. More importantly, you get used to financial discipline and develop the habit of saving money. Starting early investment gives you financial freedom and stability to pursue other interests and improve your quality of life.