A diversified portfolio guarantees one’s participation during market rallies and helps in downside protection. Hence it is essential to diversify or expand your assets. In this article, we will learn How to Diversify your Portfolio in India. In simple terms, a portfolio is a collection of all your investments in cash, cash equivalents, bonds, stocks, commodities, ETFs, REITs, etc.
Creating a good portfolio does not mean holding too many schemes or investments. You should have quality holdings that can give you a good long-term return. Most people choose to invest their invaluable money in Fixed deposits, Savings accounts, or Life insurance Schemes when it comes to investment.
Almost all financial analysts and researchers believe that investing money in a single asset class is not a good policy. Rather than investing your money in a single asset class, it is advised that you diversify your portfolio and invest a fixed percentage of your hard-earned money in more than a single asset class. This will help you have a bunch of investments, and your money keeps growing side by side.
Diversifying a portfolio is the most basic and effective investment technique with visible growth of your money. Now let’s understand where one should invest their money to lower the risk and get higher returns.
There are different asset classes where you can start investing money and diversify your portfolio. For example, you can start investing in stocks and mutual funds. These are some of the best ways to invest your money. After the devastating effects of Corona on society, many businesses took a step ahead by going online.
India is now changing. More and more people are learning about the stock market and how it can be a way of earning passively apart from their job. Before you start investing in the stock market, ensure you have proper knowledge of the stock market; otherwise, you might lose your hard-earned money.
So, if you are beginners who don’t know how to invest in the stock market and mutual funds, then no need to worry. We at The Thought Tree are there to help you.
The Thought Tree’s Stock Market Course
The Thought Tree is a Jaipur-based stock market training institute. We provide 8+ types of stock market courses, and each stock market course we offer has something special. You can easily choose the course according to your needs; whether it be fundamental or Technical analysis, you can get all the sections covered under a single roof. We have probably created the best platform for learners ranging from beginners to experts in the stock market and offer courses accordingly.
If you live outside Jaipur, you don’t need to worry; we also provide online classes. We provide individual mentorship and live trading practice to our students so that they get to understand the market. Now let’s see how to diversify your portfolio.
How to Diversify your Portfolio in India
1. Distributing your Income
Equities can add incredible value to your portfolio. Make sure you actively invest your time and money while buying equities. Don’t just gamble all your hard-earned money on a single stock or sector. It would be best if you started organizing your virtual mutual fund by investing in those companies you are familiar with and those that are highly potential. You’ll have to research a lot to know about these potent companies.
Stocks have now become the most popular assets to invest in. But there are many other assets apart from stocks where you can easily invest your money.
You can also invest in commodities (REITs) and (ETFs). As I have mentioned before, don’t just get restricted to a single asset class; think outside the box. You can also invest your money globally. You can spread your risk of downfall this way around, leading you to effortless and comparatively larger rewards.
However, many brokerage sites can lure you into tricks of investing in multiple equities to double your profit but don’t fall into this ambush of investing in many companies. Make sure you keep yourself to a portfolio that can be easily managed. There’s no point in investing in 100 different vehicles when you don’t have the time to drive them or keep them up to date. Try to restrict yourself to a maximum of 20 to 30 different investments. This is one of the best ways to Diversify your Portfolio in a correct manner.
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2. Index Funds
Index funds or fixed-income funds can add a finishing touch to your portfolio. Investing in securities that keep track of various indexes can benefit you with a long-term diversification investment. By adding some fixed-income solutions, you are further enterprising your portfolio against market volatility.
Another bonus is that you get relatively lower fees, saving some money in your pocket. Operational and managing costs are reduced as these funds do not need high maintenance.
How well do Index funds diversify your portfolio?
If we go by the definition, an index fund or ETF imitates some index. It depends on which index it may be or if it is more or less diversified than others. For example, NIFTY 50 is an index that lists the top 50 companies based on their market capitalization. So even if you own an index fund with a high market capitalization, it is not certainly a diversified portfolio. You should also include other low-cost asset classes, including bonds, reasonable allocations to commodities, and real estate.
One potential drawback of index funds’ passively organized nature is that they can be suboptimal in inefficient markets. For example, active management can be beneficial in fixed-income markets, especially during tough economic times.
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3. Debt or Fixed Income
This is the lowest risk asset class. This includes assets like government savings schemes, bank fixed deposits, etc. But always remember that these assets have low risk and offer low returns. It’s good for those who can invest for the long term and want a stress-free life. The lowest returns are also obtained from risk-free assets. Depending on the instrument or scheme, company FDs, debentures, and debt mutual funds are subject to varying credit and interest rate risk levels.
What about Over-Diversifying your Portfolio?
Diversifying your portfolio means including a range of various asset kinds into it. Diversification can help decrease portfolio risk by securing the performance of one asset or asset class that does not affect the entire portfolio. However, diversifying your portfolio at a moderate level is good, but overdoing it might cause some problems here. Firstly increasing the number of asset classes in the portfolio can make it hard to manage and more hectic to keep tracking them unless you hire an assistant to track them.
Secondly, over-diversification is also a problem for many mutual fund investors. Some funds, particularly the larger ones, have so many assets that they must hold hundreds of equities to invest a larger sum of money. This makes it practically impossible for the fund to surpass certain benchmarks and indexes, which is the whole point of investing in the fund and paying the fund manager a management fee in the first place.
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Recall the explanation of diversification mentioned earlier in this article which implies that you must buy stocks that are dissimilar to one another, whether in terms of company size, industry, sector, country, etc. In financial terms, you’re buying uncorrelated stocks or stocks that move in opposite directions at different times.
Substantial diversification of portfolios can be simply achieved by buying assets from different sectors. This can be from any sector like medicine, aeronautics, finance, etc. In the end, It is your job to shortlist the company according to its performance in the long run.
Look for Extra Expenses
Always keep track of extra fees you are paying at each transaction and if you are benefitting from the fees you are paying. Some firms usually charge a monthly fee, while others charge transaction fees. These monthly fees can add up and scrape away your bottom line.
The cheapest selection is not always the best decision. Think back to this thought whenever buying something and keep revising whether there are any other changes to your fees.
Read More: Stock Market Tips for Beginners
We have different financial goals. It can either be short or long-term, and in the same way, different asset classes are suited for different investing intervals. You must first understand the purpose of your investing and then select the type of investment option.
Selecting the right investment option is very important, and if you are a beginner, you should first learn how to invest and then start investing. We at The Thought Tree are always there to help you.