Having different types of investments can help your money grow while keeping risks low. This is called having a "diversified investment portfolio."
When you invest in different things - like fixed deposits, stocks in different industries, bonds, mutual funds, etc. you help limit risk. If one investment goes down, others may go up or stay steady, helping even out gains and losses over time.
Having a diversified investment portfolio helps ensure stable long-term portfolio growth. Your money has more opportunities to gain without being vulnerable to dips in specific assets. It's a way to grow wealth while minimising risk.
Here are some key tips to properly diversify your investment portfolio:
Tip 1: Define Your Investment Goals
The first step to creating a diversified investment portfolio is to clearly define your investment goals. These goals may be retirement planning, saving for your child's education, a house down payment fund, etc. Your goals will impact how you allocate your investments. For example, money you need in the short term should be invested more conservatively.
Tip 2: Asset Allocation
Determining the right asset allocation model that aligns with your risk appetite and timeline is crucial for diversification. Asset classes like equities, fixed income, commodities, etc., perform differently under different market conditions. Divide your portfolio across these major asset classes to take advantage of this variation. A sound investment diversification strategy includes mixing assets with varied characteristics:
- Equities (Stocks and Mutual Funds): Generally offer higher growth potential but come with higher volatility.
- Debt Instruments (Bonds, Fixed Deposits): Provide relatively stable returns and lower risk, ideal for capital preservation.
- Gold and Commodities: Often act as a hedge against inflation and market downturns.
- Real Estate: Can offer rental income and capital appreciation, but tends to be less liquid.
- Cash and Cash Equivalents: Useful for liquidity and emergency needs.
Tip 3: Diversify Within Asset Classes
Don’t just diversify across asset types — also diversify within each category. For example, in equities, invest in a diversified portfolio across sectors (technology, healthcare, finance) and company sizes (large-cap, mid-cap, small-cap). For debt, mix government securities with corporate bonds or fixed deposits.
Different investments within the same category behave differently under various market conditions. For example, in equities, technology companies might grow quickly but be more volatile, while healthcare or finance sectors may offer more stability. Similarly, large-cap companies tend to be more stable but offer slower growth, while mid-cap and small-cap companies can provide higher growth but come with more risk.
By diversifying within asset classes, you balance potential gains and risks. This means when one investment faces challenges, others may perform better, helping protect your overall portfolio and steadily grow your money.
Tip 4: Diversify Based on Your Age
Your age plays an important role in how you should diversify your investments—a strategy often called lifecycle investing. When you are younger, you have more time to recover from market ups and downs, so you can afford to take more risks by investing more in equities or growth-oriented assets. As you grow older and approach important financial goals like children’s education, marriage, and retirement, it’s wise to gradually shift your investments toward reliable, fixed-income assets such as fixed deposits. This reduces risk and helps protect your savings from sudden market falls when you need the money most.
Adjusting your portfolio according to your age helps balance growth and safety, giving you the best chance to build and preserve wealth throughout your life.
Tip 5: Choose Investment Vehicles
To implement your asset allocation model, you need to carefully select appropriate investment instruments. Equity funds like index funds and ETFs offer diversification at low costs. Fixed deposits (FDs) provide stable returns with low risk. Target date funds automatically adjust their asset allocation over time.
Tip 6: Rebalance Your Portfolio
As investment values change over time, your desired asset allocation will shift. Rebalancing brings your portfolio back in line with your original target allocations. Rebalance at least once annually or when allocations skew more than 5-10% from the targets.
Tip 7: Monitor The Results
Consistently review your portfolio's performance. Check that returns are in line with your expectations and that risk levels remain appropriate. Tweak components if needed. Also, assess if your investment goals or timelines have changed. And make adjustments to your asset allocation based on your evolving needs and risk appetite.
Key Benefits of a Diversified Portfolio
Constructing a well-diversified investment portfolio provides several advantages:
- Reduces Volatility: Various investments tend to behave differently in changing markets. Having a variety helps smooth out risks associated with individual securities.
- Enhances Returns: You gain exposure to returns across multiple investments. This aims to strengthen overall long-term portfolio returns.
- Lowers Risk: Diversification aims to limit overall portfolio risk and potential losses. Though individual components may be higher risk, the portfolio impact gets minimised through diversification.
- Matches Goals: You can structure portfolios to align with specific goals and timelines by adjusting the asset mix and selection of investments.
The Bottom Line
Building a diversified investment portfolio does require some time and effort to understand investments and effectively allocate your assets. But it is one of the smartest moves you can make for your financial future.
Diversification allows your money to grow through varied opportunities while minimising overall risk. This helps compound wealth creation over the long term through steady, sustainable returns.
Even better, you can structure your diversified portfolio to match specific goals whether that’s retirement, saving for a house, or a child’s education. Adjust the asset mix accordingly to align with your risk appetite and timeline.
While individual components of your portfolio may carry some risk, by combining investments across asset classes, markets, and other categories, you benefit from growth potential while lowering vulnerability.
Talk to a qualified financial advisor to assist with initially setting up the best diversified investment portfolio suited to your needs. But do invest some time to understand the core tenets around building a sturdy, balanced portfolio yourself.
