3 tips for diversifying your investment portfolio

Know all the details about diversifying your investment portfolio.
4 mins
16 July 2024

When it comes to investment, you do not want to keep all your money in one particular asset. This poses a risk of loss in case that specific asset fails to give profits. To avoid this risk of loss, it is essential to diversify your investments into different fields. You can invest your money in mutual funds, stocks, crypto, real estate, gold etc. In this way, if any of your investments fail, it does not affect the entire portfolio.

Diversification is not just investing your money into different assets or dividing your money into different savings accounts. The main aim is to build wealth, which is not hampered by consistent market fluctuations.

3 ways to diversify your investments:

1. Plan your goals and choose an investment class accordingly.

Planning your goal before investing is the best practice for building a diverse portfolio. You should consider various factors while planning your goals:

a) Identify if you want a slow and steady or quick growth
b) Check if you wish to invest long term or short term
c) Identify the asset type that you want to invest in
d) Identify the size of the asset that you want to invest in
e) Identify the dependencies and financial commitments that you have

It is essential to create a good balance between low and high-risk investments in order to protect your wealth. For instance, if you are looking for steady and long-term growth, which involves less risk. You should consider investing in following low-risk assets to create the foundation of your investment:

a) Mutual funds – debts
b) Fixed deposits
c) Bonds
d) Insurance

If you want to earn quick money, you must lay your hand on various high-risk potential classes like shares, properties, ULIPs, equity funds, etc.

Planning in this manner makes the calculations easier. You know well in advance where to invest and how much to invest. This process helps to create a base for your well-diversified investment portfolio.

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2. Spread the investment within the asset class.

As far as spreading the investments in different asset classes is important, distributing them within the classes is equally important to diversify your investment portfolio. This strategy further reduces your risk of failure due to market fluctuations.

You can use the following strategies to diversify your investments within the asset classes:

a) Invest in different sectors

Diversifying your investments in different classes is a good option to build wealth. Still, you can go further by investing in other market sectors, and creating an excellent investment portfolio.

For instance, if you want to invest in mutual funds. You choose to invest in a medium size asset, which boosts your returns.

But that should not mean you invest all your money again in that same sector.

You must diversify your investments into small, medium, and large assets.

This method will help you balance the higher risks, and the lower returns across the various sectors.

b) Invest in different market regions

Going global is always a good option in case of investments.
This ensures that a particular market fluctuation do not affect your entire investment portfolio.
If a country faces a crisis like a recession, natural disaster, it will affect its economic health.

In such cases, your investments will underperform no matter how well they are diversified.

To avoid such situations, try investing in different markets like global real estate, US stocks, crypto, etc.

c) Invest in different companies

Another way of diversification is spreading your investments across different companies.
For instance, you can invest in various companies that have similar asset sizes.

3. Keep reviewing your investment.

Reviewing the investments does not only mean to look at the ups and downs of the returns on your investments. It helps you maintain your investment portfolio in various ways.

For example, you are into trading, and you need to buy and sell shares on daily basis. Despite the technology to automate the trading process, you must want to know what is happening with your stocks. Also, you would like to know about other stocks in the market. This information helps you to analyse the performance of the stocks. On basis of these analytics, you can decide when to sell the stocks, make a profit and move to next investment.

Moreover, you must be aware of the charges/fees applied when you take out your profits. Some companies charge monthly fees, while some charges transactional fees. This is important because, you must know how much profit you are making after paying these charges.

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Frequently asked questions

What is the importance of diversifying portfolio?

Diversifying a portfolio is crucial to reduce risk and maximise returns. A diversified portfolio spreads investments across a broad range of asset classes, which helps to protect the investor's capital, take advantage of various market trends, and reduce the risk of significant capital losses. By balancing their risk appetites with their expected returns, investors can create a stable and resilient portfolio that can weather market changes, unexpected events, and economic conditions. A well-diversified portfolio is an essential investment strategy for achieving long-term success and creating a balanced, profitable investment portfolio.

What is the meaning of diverse portfolio?

A diverse portfolio refers to a collection of investments across several asset classes, such as stocks, bonds, mutual funds, and real estate. The aim is to distribute investments in a way that balances risk and rewards, and positions investors to take advantage of various market trends. Through diversification, investors can protect their capital from significant losses due to market fluctuations, while also maximising returns. By investing in different asset classes, a diverse portfolio allows investors to mitigate the risk of losses associated with any one asset category and create a resilient portfolio that can ride out changing economic conditions.

How can you diversify your portfolio?

Diversifying your investment portfolio can be achieved by allocating investments across various asset classes such as stocks, bonds, mutual funds, real estate, or commodities. The goal is to spread investments across assets that behave differently in different economic conditions and provide investors with exposure to different market trends. A well-diversified portfolio contains an array of investments with different levels of risk and potential returns, enabling investors to consciously balance their risk appetite with their investment goals. Investors can work with financial advisers to identify the most appropriate investment diversification strategies based on their goals, investing time horizon, and risk tolerance.

How can I make a portfolio of 1 crore in 5 years?

Making a portfolio of 1 crore in 5 years requires a sound investment strategy and a clear understanding of individual financial goals. Investors can consider investing in a mix of high performing stocks, mutual funds, and exchange-traded funds (ETFs). However, investing in equities is subject to market volatility and might lead to market risks affecting the potential returns. Other investment options like debt mutual funds, Public Provident Fund (PPF), and fixed deposits (FD) offer stability and lower risk. Diversifying investments across various instruments and reviewing them regularly can help investors achieve their goal. Identifying risks and returns and choosing the right investment plan with expert advice can also help invest strategically. It is important to note that the investment options chosen should match financial objectives, as well as the investor's risk tolerance, financial stability, and investing horizon.

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