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How to Diversify Your Portfolio & its Importance

One of the biggest mistakes you can make when investing is putting all your eggs in one basket. If you have all your funds tied up in a single type of investment, you leave yourself exposed to facing financial losses if something unfavorable happens. That is why financial experts and analysts recommend that investors should diversify their investment portfolios. Such a strategy not only increases the probability of better returns, it also ensures that any loss on one asset is evened out by the profits from other assets.

 

Diversify your investment portfolio

A good portfolio is the one which has multiple instruments like equities, bonds, mutual funds, life insurance, Provident Fund etc. By having a right mix of different instruments, your portfolio works towards both dividends and long term gains while keeping the risk-return ratio low.

 

Both Long Term and Short Term investments are important

A crucial part of your strategy should be to combine short term gains with long term financial growth. While short term investments are good when funds might be required within a specific time frame, long term investments can really help you understand investment risk management and pave the path to financial independence. Read more on different types of short term and long term investment options.

 

Invest in Mutual Funds

Mutual funds follow the model of diversified investment with your capital getting invested across assets as well as sectors depending on the kind of mutual fund. In addition to that, you have the advantage of a professional fund manager managing your account whichensures that your money is being invested wisely. Read more on mutual fund and its benefits.

 

Take low to moderate risks for higher returns – Understand your risk profile

Investment in assets like equities comes with inherent risks but that is not something that should discourage you while investing in them. Invest in direct equity for long term for rewarding gains and beating inflation. Depending on your risk tolerance, also invest in debt assets for assured returns and to keep the equity-debt ratio balanced so that it can tackle market fluctuations.

Seek advice from financial experts and broking firms to invest smartly in these assets as the accompanying returns are higher. They can contribute significantly towards fulfilling your short term financial goals like purchasing a four-wheeler or meeting the expenses for a foreign trip.

 

Invest in Retirement planning instruments

As a smart investor, you should ensure that a significant portion of your financial resources goes towards investing and saving for your retirement. That is why you should start early with buying Life Insurance (Premiums are lower at a younger age) and contributing towards your Employee/Public Provident Fund. Not only do you get assured returns on maturity, you also safeguard your later years from any unforeseen financial implications.

 

Avoid over-diversification

The age old adage is that “excess of everything is bad”. The same is applicable to investment diversification as well. Let’s consider a hypothetical scenario: Investor A has diversified his investment portfolio by investing in assets U, V and W. Subject to market ups and downs, the unified return on his investments in better than he had expected. This entices him to further diversify his portfolio and he duly obliges by adding assets X, Y and Z to it while having high expectations of getting even greater returns. However, the market fluctuations result in the losses on X,Y and Z exceeding the returns on U, V and W, thereby resulting in a net loss on investment.

Of course there is also a possibility that the risk pays off and the returns are greater. But the market volatility makes this very likely. So it is better to diversify your investment in a controlled manner.

Also think about Financial Planning which is another important facet for handling your finances tactfully. Consult a financial planner who can help plan your portfolio effectively to allow smooth regulation of your capital for expenses, investments and for paying taxes

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