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Why is it a good idea to diversify your investments ?

  • Highlights

  • Diversification of investments ensures lower risk exposure

  • Try to go for investments that offerreasonably high returns with the least risk

  • Keep a track of how much you pay in brokerage and taxes

  • But remember to plan for contingencies

While you may have that you should never put all your eggs in one basket, it cannot be truer than when it comes to your investments. One of the cornerstones of investing wisely is to never accumulate all your savings into one scheme. While you may be comfortable with a single option, don’t let a one-track mind limit your wealth creation.
Diversification is not only healthy, but also essential for your fiscal well-being because it helps lower risk. Read on to see how diversification can help work wonders for your portfolio.

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Why is diversification important?

Despite the various investment avenues available, you may be tempted to choose just one scheme that you are comfortable with and know the most about. When you invest all your money in a particular kind of option you may find that you don’t get desired results or end up losing all your money. Had you diversified, the losses would have been minimised, or you may have earned more.

Diversification is simply the exercise of putting your money in multiple investments so that if one of them doesn’t give you the expected yield, the others can still give you returns. One of the safer options you can consider is a Fixed Deposit as it keeps your money secure. Another is mutual funds that offer moderate safety and third is equity, which may involve a little more risk.

Learn about asset classes and allocation

Diversification does not mean that you should invest in multiples of the same scheme, such as investing in more than one FD. It means investing in different kinds of instruments.
Typically, your portfolio should include FDs, equity, gold, mutual funds and so on.But how to do you decide how much to invest in each? A practical way of knowing how much to invest in each category is to set aside money for emergencies and immediate needs and then use the 100 minus your age method.

The 100 minus your age method

According to this method of investing, you subtract your current age from 100 and the resulting percentage tells you how much you can invest in risky yet high return asset classes like stocks and how much you can put in stable but moderate yield instruments like FDs and company bonds.
For example, if you are 30 years old, invest 70% in risky schemes with higher returns and 30% in safer options. This calculation is the opposite when you are 70 years old, thus ensuring you are at less risk when you get older.

Why should you choose Bajaj Finance Fixed Deposits

How are risk and returns co-related?

Risk and returns are two sides of the same coin when you engage in diversification. Higher risk generally means higher returns. The most important thing to note is to assess which of your investments has given the highest returns for the least risk taken. However, just because taking more risk will fetch you more money,do not blindly go putting your money in unsecure instruments. The key is to plan your investments in a way that you strike the right balance between capital appreciation and capital preservation.

The concept of rupee-cost averaging

If you’ve been thinking of risk and returns, chances are that you have heard of rupee-cost averaging. This concept is important in portfolio diversification because it helps you understand how certain asset classes work. With this method, you simply invest the same amount of money regularly to buy an asset at the prevailing price. If the price is steep, you end up buying a lesser quantity, and if it is more, you end up buying more. The cost of what you pay for each unit gradually averages out. Since you pay much less for each unit, this method gives you an investment advantage that can be achieved only through diversification.

Watch how much you are paying in commissions and taxes

The goal of having a portfolio with your money spread across various asset classes is not to ensure maximum yields nor to wipe out risk. Like all other things, you should never go overboard with diversification. Just as being too conservative will get you nowhere, being too bold can prove to be counter effective. Therefore, do not invest in too many FDs or too many funds or bonds. Remember, in some of these asset classes you have topay certain commissions or brokerage fees while in others, you have topay taxes and in others, both.

So, be prudent while investing your savings. Use diversification as a tool to maximise returns and build your wealth for the future.

DISCLAIMER: The mentioned fixed deposit interest rates are indicative only, and may be subject to change periodically. Please check the interest rates on our website.

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