Invest Funds presents to you the guide to diversification of portfolio. As you all know that when you diversify your investments it means that you select or invest in multiple asset classes. Diversification of portfolio is done to reduce risk & increases the chance of better returns thus developing a risk-proof portfolio.
Guide to diversification of portfolio | How to plan your diversification strategy?
When you diversify, your risks are reduced. However, the important thing to concentrate here must be the quality of your investment assets & not quantity. You won’t get desired returns if you indulge in too much or too less of diversification. It depends on the quality of investments. Therefore, your primary task should be to plan a balanced & wise diversification strategy to get better returns.
Guide to diversification of portfolio | Why do I need to diversify?
First, diversification reduces risk. Second, you can get better returns from different asset classes rather than only one class which may not perform well at times. However, in diversification if one class underperforms your returns are balanced from good returns from another asset classes.
Guide to diversification of portfolio | How should I diversify in stocks?
You can diversify in stocks by the purchase of stocks from various sectors. However, the sectors you select should be different from each other. This is done so that loss in one sector gets offset by gain in other sector.
For example, if your investments in Infrastructure stocks underperform but those in pharma stocks perform well then your loss is offset by the gains from pharma stocks. However, the extent of diversification should be kept under control such that it’s easily managed and tracked by you.
Guide to diversification of portfolio | What’s the benefit of investments in various asset categories?
The benefits of investments in various asset categories are as follows-
- You are assured of fixed income, for example bonds.
- Investments in stocks & equity funds sustain the growth of your portfolio.
- Liquid investment in bank FDs & liquid assets guarantee liquidity.
- Income funds generate stability of income.
Guide to diversification of portfolio | What benefits do I get from a diversified portfolio?
You get the following benefits-
- Your returns are multiplied over a time frame.
- Your risks are reduced.
- The liquidity rate of your portfolio increases.
- Single investment can cause you to face higher risk & lower returns which is not the case with diversification.
Guide to diversification of portfolio | What risk factors I need to take care of in terms of Portfolio Diversification?
- Investments in stock market don’t guarantee fixed returns.
- You may face losses in certain sectors during emergencies such as commodity meltdown, global economic crises & other socio-political factors.
Guide to diversification of portfolio | What are the disadvantages of over-diversification?
- Over-diversification creates difficulty in maintaining & managing your investments. Also your quality of returns may degrade with problems to keep a track of different investments.
- Increase in the cost of transactions such as bank expenses, fund manager charges, DP charges & so on.
Guide to diversification of portfolio | What are the disadvantages of too less diversification?
- Risk of losses on a few assets increases coupled with higher risk.
Hence, now you know about the dos and don’ts you need to remember in terms of diversification of your portfolio. If you follow this guide to diversification of portfolio & diversify your portfolio in a carefully planned manner then you can easily achieve your financial goals over a period of time.