Saturday, 30 July 2016

Why Diversification in a must in portfolio

“Despite roller coaster ride of stock market, You can still make a killing on the bourses with the right mix of products and an investment horizon”
We as human being usually plan everything in advance and with care, whether it is going abroad for a vacation or planning for a new home. However, when it comes to financial investing, many of us do not have a proper plan. And even if you have a concrete plan, it is quite likely that he may not stick to it.

What-is-Diversification-in-portfolio



This is where hundreds of investors make a huge mistake. There are chances that you will move out if there is weakness in the markets or redeem your investments for the fear of a further downside in the equity markets.

But you must stay focused and stick to your plan to bear fruits of investments in the future. Before entering into any financial investment like mutual funds, insurance, tax planning or equity, you need to have a proper plan and enter with a specific time frame in mind.

For instance, if you need money after one year, you should clearly put money in liquid or liquid plus funds or if you have an investment horizon of 10 years, you should invest only in equity diversified funds.


DIVERSIFICATION IS A MUST IN PORTFOLIO

Investment diversification is a risk management strategy. If the portfolio is properly diversified, you will have adequate risk-reward characteristics in your portfolio.
Holding onto one type of investment might have its own risks (like holding only sectoral fund or mid- and small-cap fund). You should allocate some amount to such products but only as a supplement to your main investments. The most basic investment diversification strategy should include both investments - debt as well as equity. Having some exposure to other categories like international fund or balanced fund might be useful to you in volatile times.

This investment diversification in mutual funds means that you as an investor is able to obtain immediate access to hundreds of individual stocks or debt papers with very minimum investments. If not mutual funds, you have to buy different stocks and bonds in order to get sufficient diversification in their portfolios.

Please bear in their mind that no matter how diversified their portfolio is, the risk can never be completely eliminated. The most important point is to find a medium between risk and returns.


TIME HORIZON

One of the integral elements that should be taken into consideration is the time horizon for which investments need to be held. Many times you are unaware of the product you invest in. This in turn reduces your overall returns.

If you are looking for safety and less volatility in your portfolios, opt for debt schemes or if you are a senior citizen looking for streams of income should invest in monthly income plans (MIPs).

Once debt funds are in trouble, you should always remain careful and your investment portfolios should be actively managed depending upon the views on interest rates. If you have chalked out your investment horizon, the next step should be selecting funds in your portfolio.

As said earlier individuals should always invest with a time horizon. If you are unsure about it, then invest in equity funds through systematic investment plans (SIPs).


DON’T BE GREEDY FOR SHORT-TERM RETURNS

In the investment world, all of us have to take few risks to generate better returns, going forward. But generally anyone who goes for short-term returns or even high returns in a short time frame tends to lose money.

Greed is one of the many evils in financial investment and, therefore, you should not invest in thematic funds or small-cap funds for a shorter duration.

No matter how big the returns are, there are many investors who put all their investments in the same basket (for example, all systematic investment plans are in one fund or in different schemes of the same fund house), which is also a huge risk.

You have to spread your money across different financial investments and different time frames to reduce the chance of losing money. This exercise would also ensure that risks are reduced even if there is fluctuation in returns without sacrificing on future gains.


PROPER ASSET ALLOCATION

After all the above considerations, next step in building a portfolio should be proper asset allocation within the portfolio. In mutual funds, asset allocations are of two parts.

One is regarding how much you need to allocate between equity and debt. While at the micro level, one needs to decide what kind of funds will suite his/her investment profile (aggressive investors look for mid- and small-cap funds, while conservative investors go for a balanced scheme).
 
The most important rule of asset allocation is to match investment time frame with the expected life span of the fund. 
Say for example, if you want to invest some amount for one year, you should blindly go in for liquid or liquid plus funds. But the thumb rule suggests that the money that is needed within the next three-five years must be in debt funds and anything that you want to invest in for over five years should be in equity funds (which can be diversified equity funds or mid- and small-cap funds).

START WITH SIMPLE INVESTMENTS

There are hundreds of equity schemes in the country and there are many among them, which are difficult for retail investors to understand. There are some arbitrage funds or P/E ratio funds or even asset allocation funds, which can also be considered for investment purposes.

However, these categories of funds are only meant for seasoned investors and those who know the risks of investing in such products. It is believed that investments for retail investors should remain as simple and hassle-free as possible.

Even in terms of returns if we look at longer duration, pure diversified equity funds have delivered much better returns compared to such thematic funds.

In financial investment, one should stick to their fund and investment horizon to reap better returns over a longer period of time. A retail investor’s portfolio should have few simple products, realistic investment expectations and a decent time frame for the money to grow. If all this is done properly, one can have positive results over a longer time frame.


GOAL-ORIENTED PORTFOLIOS

Each one of us wants to go on an international vacation or retire early or better still have continuous income in the working life. These are just a few of the many goals you may have from your investments and some objectives change as life moves on.

So, for retirement 35-year-old investors should start investing in systematic investment plans (SIPs) in large and mid-cap funds. Say for their daughter’s marriage, you should select a product that has equity and gold component.

Retired investors seeking monthly income should invest in monthly income plans (MIPs) or even post office monthly income schemes, which can protect the capital that they have invested in.

Long-term funds should be in diversified equity funds and emergency fund should be invested in liquid funds. Such implementation allows clear thinking about each goal, supported by investments, which will be able to meet that particular goal in the future.


CHECKS BEFORE INVESTING

Return on investment is the amount of money you receive as compared to the amount you have invested in. While risk is the probability that your investment will gain or lose money, before investing, you also need to consider your own risk tolerance and your ability to absorb a loss.

In general terms, higher the risk, higher is the profit on an investment. Risk is attached to each and every financial instrument. So, you need to identify risk and returns according to your investment profile.

Investments in many securities come with a degree of risk and if returns are not in proportion with the risks taken, then it is not worth investing in.

Risk-adjusted returns are calculated against returns given by a risk-free instrument, which is a usually government-backed debt paper or term deposits of banks. A superior mutual fund is one which gives better returns than others for the same kind of risk taken.

CONTINUOUS REVIEW AND ANALYSIS

There are several investors whose investments are lying in cold storage since many years. They have either stopped their investments or have not tracked them for years. There are even those investors who have dozens of funds overlapping other funds. While some have merged, others have closed down. But this is not the way to run a portfolio. You must review and analyze their portfolios once or twice every six months.

One of the best yardsticks to analyze a portfolio is to look at long-terms returns. Many times some good quality funds underperform in the market. You should never redeem your investments by looking at short-term returns.

Look at the rating of the schemes, whether they have improved or fared badly. If during the exercise you find that your investment is continuously giving negative returns over the past few years, you should immediately move out and invest in other well-rated equity or debt funds.

Bottom Line
For some investors, emotions often get in the way of the investments, but one has to keep emotions at bay in such matters. Sentiments have a dominant influence when it comes to your money. But do not let them lead you away from a good long-term investment plan.

I hope you enjoyed reading the article , it takes time to write  articles with facts and figures, request you to please spread the word. A good way to start is to share this page on your social circle using floating social share bar on the left.

Who doesn't like a financial healthy life,In case if you want one contact me for Financial Planning, please do drop an email to me at vipuls1979@gmail.com. I would be happy to assist you

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