19 Apr 2023
When we take a journey, we hope to reap good memories, but at the same time, we also pray that the trip goes safely.
Similarly, in our investment journey, two things matter the most— one, that we generate optimum wealth and the second, that our investments remain unharmed.
In such cases, you will want a strategy that can help you generate optimal returns and remain potentially unaffected by market shocks.
The answer could lie in ‘diversification’. Diversification is like insurance against unforeseen crises. Generally, it refers to spreading your funds across different investment instruments.
Here are a few key features to help you understand diversification:
Always consider the diversification of your investment portfolio when kick-starting your investment itself and not when things are going downhill with the economy or markets. Undertaking diversification at the 11th hour may not be able to save you from losses already incurred.
Analyse the different asset classes like equities, debt, gold, real estate etc., based on their risks, potential benefits and investment goal. Each asset class varies from the other on these parameters.
Diversification is not only the allocation of funds in different asset classes but also means diversifying within the different asset class categories. For example, equities can be investments in large-cap, mid-cap or small-cap companies. Besides, investment in equities can also be diversified into sectors/themes. Again, debt has various categories, including government and corporate bonds.
One of the most important aspects of undertaking diversification is rebalancing your portfolio regularly to maintain ideal asset allocation. Let’s say the current equity market volatility is making you nervous; diversification can help you allocate funds into an instrument like debt, generally unaffected by equity market movements.
Diversification can also help you branch out to new investment assets like funds investing in foreign funds and stocks related to niche sectors, thus allowing you to tap new avenues of potential wealth creation.
As an individual investor, if you find the task of diversification tedious and complicated, you can opt for multi-asset allocation funds.
So, remember only to put some of your eggs in one basket.
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Investors may consult their financial advisors and/or tax advisors before making any investment decisions.
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