Regular, smart & disciplined investment from a very early age is the best possible way to allow your money to get mature. Diversification is one such investment strategy that truly is easy and provides major benefits to the investors. A diversified investment is a strategic plan where you invest your money in various assets to receive the highest return while reducing likely risks.
A typical diversified investment is basically a mixture of stocks investment, properties, fixed income, and commodities. The advantage of spreading your investments is that each class contains a potential for returns & has a different level of risk.
Benefits of diversification include:
- Reduces Portfolio Risk
- Preserving capital
- Enhances Risk-Adjusted Return
- Balancing your Economic Balance sheet
- Safeguard against adverse market cycles
- Reduces volatility
How to diversify your investment?
Diversifying investments is very crucial for better risk management and therefore it has to be done carefully. Here are a few ways how you can effectively diversify your investments:
1) Review your entire financial situation: Before you tend to make an investment plan, take an honest look at your entire financial investments. This can include your property investments, fixed deposits, shares, managed funds, cash in saving accounts, etc. This will give you an idea about the total investments and where you need to diversify. Before proceeding, understand the structure and working of the asset class, and try to invest in a few asset classes, as complications tend to be on the lower side.
2) Global Investing: Apart from investing in domestic stocks, diversifying your investments in foreign stocks would provide greater stability in your investment portfolio through geographical diversification. Markets around the world perform differently as a result, global investing enables you to access various investment opportunities to deliver better returns compared to domestic markets.
3) ETFs and LICs: LICs and Exchange Traded Funds (ETFs) are two popular investment choices that provide a low-cost way to invest in an asset class to diversify your portfolio in a single & cost-effective transaction. LICs are generally investment companies listed on an exchange and ETFs are investment funds listed on an exchange.
4) Rebalance regularly: Diversification isn’t a one-time task; therefore you should check your investment regularly and make changes accordingly at least two times per year. As investments grow they deviate from the original target. So, adjusting your target will ensure that your investment fits your goals, risk tolerance, & investment horizon.
5) Mutual Funds: Investing in mutual funds is also a smart approach for investors. As mutual funds are already groups of stocks, after investment you’ll automatically be diversified to a certain degree. With the help of a financial advisor, you will be able to select the mutual funds that fit your diversification level & desired risk.
The value of your investment can change according to time. Although it is hard to find completely different assets to invest in, efficient investment diversification across geographies and asset classes can help you build a portfolio with lower risk.
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