Investing is a viable way to build wealth and achieve your financial goals. However, it’s not always easy to figure out which investment strategy to follow. It is prudent to maintain a diverse portfolio to limit risk and maximize rewards. Here’s a quick guide on how to diversify your investment portfolio in India.
What Is Diversification?
Diversification is an investment technique that involves buying a variety of assets across a range of asset classes and industries. This is surefire way to boost your profits while reducing your overall risk.
There are many ways to achieve diversification, such as owning stocks from different countries and investing in real estate. Your mix of investments should preferably be composed of stocks and fixed-income investments. Buying individual bonds is a great example of fixed-income investment. You may also buy mutual funds and exchange traded funds, however those are not exclusively for fixed-income investments.
Why Diversification Matters
Before learning how to diversify your investment portfolio in India, it’s helpful to understand why diversification is important. You can reduce your portfolio’s risk profile by choosing investments that aren’t in closely related industries. Therefore, when a market event affects an industry you’ve invested in, that event won’t negatively impact your other investments.
Diversifying also mitigates the uncertainty of investing. While every financial market has a level of uncertainty, putting your capital in separate investments spreads out risk. Thus, you have a better chance of protecting and growing your investment.
How to Build a Diversified Portfolio
There may be many investment options to choose from, but hopefully these simple tips on how to diversify your investment portfolio in India can make the task easier for you.
Create a Diversified Investment Plan
Although there isn’t a set rule regarding how many stocks in a portfolio can be diversified, most investors have at least 20 or even 60 stocks in their portfolios.
You can invest in assets within an asset class or across different asset classes. If you wish to invest within an asset class, you can start with buying the market index, such as the Russell 2000 or the S&P 500. You can go with traditional investments, such as bonds and stocks, or alternative investments, such as real estate and debt investing, for different asset classes. Financial advisers should also know how to make a diversified investment portfolio.
Because stock prices constantly move up and down, the beta of an individual stock can help you understand the level of volatility a particular stock has, when compared to the overall stock market.
While global companies play a significant part in different stock markets, keep in mind that the United States takes the top spot in terms of market capitalization. Thus, a great way to diversify your investment portfolio if you are from India is to invest in businesses not available within your home country.
Another strategy for geographic diversification is to have some investments outside your local borders, since another country’s market may perform differently when compared to your home market, due to different macroeconomic risks.
Check Your Portfolio Often
The rapidly changing world market can sour your investments and damage your portfolio. Keeping a watchful eye on your portfolio allows you to change your investments when the risk level doesn’t correspond with your financial goals or strategy.
It’s advisable to rebalance your portfolio at least twice a year to avoid taking on more risks than expected.