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Wednesday, October 27, 2021

Investment Diversification: What is the right way to diversify in a portfolio, know how it can help market volatility

As an investor, it is very important for you to know how to do asset allocation in your portfolio.

Investment Diversification : In today’s time, having a good portfolio is very important if you want good returns through investment. Many investors invest all their money in shares or mutual funds. The advantage of diversification is that it largely reduces the risk in your investment. Apart from this, it also increases your returns over the long term. Each asset class has different characteristics. Therefore, the pattern of returns is also different in them. An investor should strike the right balance of equity, fixed income, real estate, gold and other commodities in his portfolio.

As an investor, it is very important for you to know how to do asset allocation in your portfolio. Investors should allocate assets keeping in mind their personal investment goals and risk appetite. Asset allocation helps in planning an investment strategy. An advantage of asset allocation is that if there is fluctuation in one asset class, it may not necessarily be the same in the other. For example, if there is a fall in the stock market, then there may be no fall in gold.

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Mutual fund investments have given very good returns to the investors through the first Systematic Investment Plan. However, returns are not guaranteed in the market, so you may end up with losses in spite of a sound strategy including a good financial goal and risk appetite. But even then, experts believe that diversification is very important in the portfolio to generate returns. You should try to build a balanced portfolio keeping in mind your needs and goals.

Understand your goals and risk taking ability

Your investment goals and risk appetite largely depend on your age, income, tenure and the reason behind the investment. Investors who are still young and whose family is not dependent on them can invest a major part of their investment in equities. With the passage of time in life, our needs and goals also keep on changing. In such a situation, you can switch to a hybrid fund later. Through this not only your returns are assured but the risk is also carefully minimized. Investors who want a stable source of income with minimal risk can invest in short term funds and liquid funds.

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Major Asset Classes for Diversification

Equity, fixed income, real estate and alternative investments can be the major asset classes for diversification. A good way of diversification can be investing in mutual funds. There is a lot of transparency in this and it can also be cheap in terms of cost. There are many options available in mutual funds, so it can be used to build a strong portfolio. There is a negative relationship between stocks and bonds. Once you understand your goals and risk appetite, then you should choose the right asset for investment. There are many options available in today’s time so getting the right asset allocation is not an easy task. If you want to invest for a specific financial goal, you can invest in a mix of equity and debt. This will keep your portfolio safe from market volatility.

Portfolio review is essential

Financial planners and fund managers believe that you should review your portfolio regularly. This is important because the asset class that you had earlier expected better returns may lose its importance in terms of returns over time. If the strategy regarding such asset classes is not changed immediately, then you may have to bear a big loss. As the market changes, you should also change your portfolio. Investors need to understand that balancing a portfolio is not a one-time task. To ensure that the assets we have invested in will continue to deliver better returns, regular reviews are essential.

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Nisha Chawlahttps://www.businesskhabar.com/
She is an expert in Banking, Finance and working with an international bank. She sharing her ideas and knowledge with Business Khabar.
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