Portfolio Diversification 6 ways how to Not break the egg
“Do not put all your eggs in one basket” is a phrase we take in school while familiarizing ourselves with the ins and outs of the English language. Some of us have learned it the hard way, when they accidentally drop a basket full of eggs. The result is ultimately messy, monetarily, physically and visually.
So what is the medicine? Obviously it’s just by dividing the eggs and storing them in separate baskets. In the financial world many investors follow the opposite way. They fail to heed the tested idiom this time. Their fate is the same as broken eggs.
How to diversify your investment?
Even with the cost of repetition, it is necessary to reiterate that by not diversifying the portfolio, investors bear the risk of being financially wasted. It is always useful to remember that if the base of the physical structure, whether it is a building or a monument, is spacious, it is literally in a better place. Thus, by diversifying or spreading the investment corpus, investors are on a better footing.
The process of portfolio diversification for investors is not easy and is also a one-time sport. Discipline in the approach should be invested in the minds of investors when trading on the stock market. Allocating investments among the various financial instruments is the key to diversification. While no market expert will claim that diversification can hedge against market losses, it certainly helps reduce damage when things go bad.
Let’s look at an example where the high net worth of an individual has an asset worth rupee 5 crore. From here, the value of its immovable assets in the form of apartments in a prime location in Mumbai is worth 4.5 crore rupees. If suddenly by unwanted actions of God, his apartment is damaged beyond redemption, then the entire value of his investment becomes futile. Portfolio Diversification 6 ways how to Not break the egg
Another example is about the man who likes to buy shares of one particular IT company. These shares have given him an abundant advantage over the past years and hence he has never thought beyond it. One day the market went to Topsy-Turvey and all the money was auctioned.
This is a typical example we encounter and it highlights the adverse effects of non-diversification. Here are six very useful options for readers and investors to follow for portfolio diversification:
I. Across Class of Assets: Not all investors understand well the nuance of the stock market and it is always safe to invest in various channels such as stocks (equities, mutual funds), debt instruments, commodities such as gold and / or silver etc. , real estate and save some liquid money. II. Inside Asset Class: A particular asset class will consist of similar types of options in different companies or instruments. Equity investments can be spread across multiple sectors. FDs can be made with different banks. Instead of investing in an equity fund, you can divide it into 3 different equity funds. I, I, I. Across the geographical boundary: Investors can always choose to spread their investment globally. This will add dimension to the investment corpus as it will provide additional benefits from benefits arising from currency fluctuations. Property can be purchased in various countries around the world. This will give investors a fair chance to minimize losses if a country is shaken by a natural disaster or political upheaval. This will protect you from currency fluctuations.
IV. In Capitalization: When you invest in the stock market, you can spread your investment to different market capitalizations such as small caps, middle caps and big hats. You can do this diversification when investing directly and also when investing through mutual funds. Large caps are less stable when compared to mid and small caps. Mid and small cap has got greater potential return when compared with upper cap. Portfolio Diversification 6 ways how to Not break the egg
V. All Time: Investors can systematically spread their investments based on time index. Some short-term (say 3 years), some medium term (3 to 5 years) and other long-term investments (above 5 years) will provide balance and excellence in the portfolio. A little planning will help the investor in determining the priority of his life and investing accordingly. From home purchases, to studying children and ultimately their marriage, everything can be achieved by taking timely investment decisions.
VI. Across Style: With style it means investors can choose between generating regular income and capital appreciation. You can also spread equity investments