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Diversification in Investing is the Best Policy

  11/2/18 6:02 AM

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Pranab remembers his mother’s advice of not stacking all his money in one place while travelling. But he doesn’t understand the importance of it when it comes to investing his money wisely. Pranab’s wife Arprita, asked Pranab to follow his mother’s advice when it comes to investing his money?

Let’s find out.

“I remember my mom use to say, beta don’t keep your money in one place while travelling”

Arpita asked, “Why did she give you that as an advice?”

“I never thought you would ask me this, Arpita. What if someone picks your pocket? Atleast you have some money with you to manage some expenses.”

“Mother’s know best Pranab! Why don’t you follow her advice when it comes to investing your money?”

“Sorry I didn’t get you Arpita.”

“It’s simple! Financial Experts suggest that diversification is the most important component of reaching long-term financial goals while minimizing risk. Always trust our elder’s and expert’s advice. Diversification is the best policy. Arpita knows that investing money in different places diversifies the risk portfolio of the investor and helps him to reach his financial goals in the long run.

Let me explain.

A popular way to manage risk in the financial markets is through diversification. Investing in a broad range of investments, assets classes and geographies might seem simple enough, but getting the right mix to help you reach your goals can be difficult.

In a diversified portfolio, any fall in one asset class should be offset by better performance in another. Whilst evidence suggests that it’s difficult for active stock pickers to consistently outperform the market over time, a diversified portfolio is typically better insulated against the downside risk.

Read on to find out more about how to diversify your portfolio.

How to diversify your portfolio?

The first step in developing a diverse portfolio is defining your investment goals, risk tolerance, financial situation, and timeline. Figure out how much money you have to invest. Also, consider these things – how much return you wish to earn? How soon you want to see returns? How much risk are you willing to take? The answer to these questions will help to determine your appropriate asset allocation.

Generally, stocks are more volatile than other types of investments, providing both a high potential for growth and a high risk of loss. Bonds or short-term investments are less risky, but their stability means slow growth.

Your timeline also factors into what investments are right for you. Because of the volatility of stocks, many experts recommend holding onto them for a long time, so your investments grow over time to mitigate losses. On the other hand, bonds and other stable investments tend to grow steadily and at a low rate and may be better for short-term investments. Once you figure out the best investments for your situation, you must decide how you want to spread your assets among them. An example would be 60% of your portfolio in stocks and 40% in bonds.

Then, within these asset classes, you’ll likely want to diversify as well. Experts say you shouldn’t put all of your money into one stock, or even one sector. To mitigate risk and improve the possibility of growth, choose investments across a variety of areas. You may decide to diversify by market capitalization, geography and sector for stocks. For bonds, you may decide to diversify by maturities, credit qualities and durations.

By diversifying your portfolio, you minimize the risk of your investments, as compared to putting all of your money into one asset. To build a diversified portfolio, you look for assets that haven’t historically moved in the same direction at the same time. That way, if one portion of your portfolio is in decline, the other portions are ideally growing or maintaining wealth.

If you are an aggressive investor then ULIP is a great option for you. They provide the dual benefit of market-linked returns and protection. ULIP is a great investment option for long-term wealth creation like retirement planning or child education. ULIP, an investment cum insurance product provides the investor with transparency and flexibility. It gives the investor an option to switch between funds based on risk appetite and market’s performance. The new age ULIP like Edelweiss Tokio Life Wealth Plus provides unlimited switches that too free of charge. It also has no policy and administration costs. It provides additional allocation at regular intervals so that you get good returns.

Hence, the new age ULIP can help you customize your investment components just so that you get the right flavour of returns.

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