Why &
How To Diversify Your Portfolio?
Why to
Diversify your Portfolio?
Diversification helps in increasing returns and reduces the overall market risk in your
portfolio by allocating capital across all types of investment funds. It is the
best investment technique that is helpful in reducing the risk associated with
your portfolio.
Diversification
minimizes the risks while investing for the long-term. It is important to
manage your wealth because different investments change value at different
times. , It is very crucial to understand
diversification’s value in the investment world whether you are an aspiring
portfolio manager or an investor curious. It helps you to know how portfolio is
constructed. Diversification helps you to manage risk and reward
in your portfolio so that you don’t lose your sleep on market ups and
downs.
The
best and most effective way to diversify your investments is through mutual
funds. The best investment plan in which you can invest money includes stocks,
bonds, cash, real estate, gold, and other commodities.
What
are the components of a diversified portfolio?
There are few
major components of a diversified portfolio which are given below:-
·
Equity
·
Debt
·
Gold
·
Bonds
Equity
Equity
investments have the highest potential to give higher returns over the long
run. But it also carries the highest risk in your portfolio. The higher return
comes with greater risk especially in the short run. Equities fund is volatile
as compared to other asset classes. Investing in equity mutual fund would be
the best way to take exposure in equities. Equity mutual funds are diversified
funds as fund managers invest in different stocks and across sectors which optimizes
the risk in your portfolio. best financial advisor in Lucknow
Debt
Debt
is another important component of a diversified portfolio. While equities have
the potential to grow your investment, debt investments provide stability. It acts
as a cushion through the market cycles. Debt instruments include debt mutual
funds, fixed deposits and bonds. The main objective of debt fund is to provide investor
a capital protection along with inflation-beating returns. Debt investments can
also be a good source of income.
Gold
Gold is a step higher than fixed income in the risk declenation. Investing
in Gold has higher risk as compared to the fixed income, but lower risk than
equity. Historically, Gold has given potential returns compared to fixed income
in the long term and usually is seen as a hedge to inflation in the long term. Investors
need to have long investment horizon for gold because gold is underperforming from
long periods of time for fixed income.
Bonds
Bonds provide regular interest income. Bonds are considered to be less volatile than stocks. They act as a shield against the unpredictable stock market ups and downs. Investors who are more focused on safety than growth can go for high-quality bonds, while reducing their exposure to stocks.
Why
is diversification important?
Diversification
minimizes the market risks associated with your portfolio. Let assume that two
years ago, you had invested your entire savings in a particular stock. And now,
the airline is near bankruptcy and the stock price goes down 60% in one month.
Would you be comfortable in that kind of scenario? Most of the people would not.
You would have less stressed out if you had diversified your portfolio and
invested in a few other companies rather than taking 100% exposure in one
particular stock.
Diversification
is important because different investment options react differently to the same
development or they move in a different pattern. For example, real estate and
gold tend to underperform whereas the equity markets are soaring. A cut in the
interest rate may benefit the bond market but it may not be good news for individuals
having fixed deposits.
How
to diversify your portfolio?
Diversifying
your portfolio is as healthy as consuming green leafy vegetables, exercising
and meditating on a regular basis. Hence, it is important to diversify.
Investment is no different. Spread your
investments among different asset classes. A diversified portfolio should
include equities, debt, cash and gold because different investments come with
different risk and returns. Higher the returns, higher will be the risk factor
on investment and vice versa.
Diversification
is also necessary within an asset class. It is recommended that you have mutual
funds across market capitalization such as large cap, mid cap funds and other investment
strategies.
That’s all
from the above we learnt that diversification is important for every investor
whether it is across asset classes or within an asset class. The nature of
diversification basically depends upon the financial goals, time horizon and the
risk tolerance. It is also important to keep diversification of the portfolio updated
on a regular basis.
We the best financial advisor in Lucknow is there to help you manage your wealth and make you aware of market risk .
For any financial advice do consult:-
Best financial advisor in Lucknow
best mutual fund advisor in Lucknow
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