3 tips for diversifying your investment portfolio

Know all the details about diversifying your investment portfolio.

4 mins
14 Oct 2022

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.

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.

Click here to calculate your returns on FD using FD calculator.