If you want to start investing, diversifying your investment portfolio is important.
There are different asset classes where one may invest their money for the purpose of diversification. The logic behind diversification is very simple, yet highly potent to be effective.
Each asset class behaves a little or very differently at different times. For example, it is believed that when the stock market goes under a sharp correction, the prices of gold rise. Hence having gold in one’s portfolio could hedge against a sharp decline in equity investment.
This post tells you about 5 ways to diversify your investment portfolio. Read on!
An investment portfolio is like a detailed statement of all your investments. A diversified investment portfolio has debt assets like FD, bonds, etc. along with equity assets like stocks, mutual funds, etc. You are also free to include more types of assets in your portfolio such as cryptocurrency, real estate, land, gold, etc. But what is investment portfolio diversification? Scroll down to find out.
It is the famous proverb of ‘not keeping all the eggs in the same basket’. Different asset classes have their own pros and cons, highs and lows. Hence to safeguard their overall portfolio, one should be investing in different types of assets, so that their invested money could grow without a drastic failure or low. For example, Gold is considered a good hedge against equity stocks, because when the equity market falls, gold prices rise. Hence having gold in one’s portfolio could help to increase the stability of the overall portfolio.
If you are new to investing and want to learn how to diversify your investment portfolio, take a look at the following section.
Indian Government and companies issue bonds from time to time, these bonds offer certain ‘fixed’ returns over a certain spread of time. Investing in such debt instruments could help you to enjoy a risk-free and fixed return over your investment. A few examples of debt instruments are Fixed Deposits, Bonds/Debentures, National Savings Certificate, Kisan Vikas Patra, Treasury Bills, etc.
One of the favourite investments of Indians. This yellow precious metal is considered to be very safe and less volatile, making it safe for long-term investments.
Gold could act as a financial cushion in times of emergency, it could also be put as collateral while asking for a loan from a lender, etc. Today there are multiple ways through which one could invest in gold. You can buy gold jewellery and/or buy pure grade gold in the form of coins, biscuits, bars, etc.
Apart from these physical forms, one could also invest in Gold ETF, Digital Gold, or the Sovereign Gold Bond(SGB).
Out of all these, SGB stands out a little because apart from the market value of gold on maturity, it offers an interest of 2.5% as well.
This form of asset is very capital intensive and is a form of ‘investment diversification’ only for High Net Worth Individuals.
Investing in real estate tests patience and bank balance both at the same time. From an investment point of view, investing in commercial real estate rather than residential makes much more sense. The reason is that commercial real estate properties are more likely to have long-term customers, unlike residential properties. This saves the investor from the trouble of regularly finding a new tenant.
If someone finds a good venue to invest in, then a continuous good income could be generated in the form of rental fees, while the real estate’s value appreciates as well.
Highly volatile, highly risky. But if done wisely, then it’s extremely rewarding. There are primarily two ways of investing in the equity market; mutual funds, and direct stock investments.
For a layman, it is advised to invest in index mutual funds, as it is perhaps the safest form of equity investment. For people who wish to learn and then invest, they could engage in active mutual funds or direct stocks.
Otherwise, one may also seek advice from an investment professional before investing in the equity asset class. As they may be able to guide you better in doing equity investment.
Under this investment class, one could invest in perhaps the riskiest forms of investment. The only condition is that you only invest the money which you could ‘literally’ afford to lose.
Investing in startups, cryptocurrencies and NFTs are some of the common examples for this form of investment.
This investment is ‘extremely risky’ with a probability of ‘extremely high returns’.
As non-traditional investments are very lucrative due to their huge reports of giving extraordinary returns in a short span, people tend to invest all the money they have, ignoring the risks associated with this investment. Hence, only invest the money in non-traditional asset classes, which you could ‘afford’ to lose.
Planning to invest is a great way to grow your wealth. However, it is also important to diversify your investment portfolio. Investing in various sections like mutual funds, bonds, real estate, etc. will keep your money safe and cushioned. Now that you know how to diversify your investments, go ahead and invest!
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