Your investment portfolio is your base to a future of healthy financial planning and there are different ways to diversify your investment portfolio. If you go wrong with your investments, you will need time and acumen to bring yourself back to a healthy state of finances. One of the key ingredients towards a healthy portfolio is diversification.
Let us take a peek on ways to diversify your investment portfolio.
What is diversification ?
Diversification is defined as spreading of your investments across different parameters to reduce risk. These parameters could endanger your portfolio and reduce its return – your proactive measures to reduce its impact is defined as diversification.
Diversification is not a solution to all investment portfolio woes. It is a mechanism by which the impact of the risk is reduced, if not eliminated. So if the risk were to materialize, then diversification would ensure that part of your portfolio is impacted by the risk while part of it is not. This balances your portfolio.
4 methods to achieve diversification or ways to diversify your investment portfolio
1. Do not put all your eggs in one basket
The line itself is self explanatory. You should not invest all hard earned money in just one investment class. There are so many investment avenues available. Your money should be spread across all.
So you should dab your hands with equity, debt, real estate or gold. However, you cannot have all your money into just one investment class, say equity. If the equity markets were to tank, your personal net worth would get eroded since all your money was in equity.
When one asset class under performs, others in the portfolio will over perform. This ensures that decrease in value in one asset class does not decrease your portfolio value to a great degree as the other asset classes have over performed.
Spreading your monies across different asset classes ensures that non performance of one asset class does not hurt the overall return of the portfolio and achieves diversification.
2. Spread your investment across different timezones to ensure diversification
If you follow goal based investing, then this will come as a result automatically. Your short term goals will mature within 2-3 years while long term goals will ensure that you keep investing for the long term.
However, for all your short term or long term goals, keep the maturity proceeds over different time periods. This ensures that your investments are spread across large time periods and do not suffer from adverse impacts which happen on and off.
Also note that you should not have a lump-sum of maturity money come to you once in the year when you require the money. Stagger that maturity across different months of the year when money is needed.
This ensures that you can take care of adverse impacts if it were to happen in some months of the year.
Supposed you needed Rs 5 lakhs 3 years from now. If your maturity of 5 lakhs is going to come via a close ended fund or tax saving mutual fund and that mutual fund tanks in the final year when you need the money (third year), then you have little choice. But if you were to spread this across different mutual funds, some debt and some equity, which mature in different months 3 years from now, then adverse impact to one mutual fund would not impact the others. Your diversification is better off here.
3. Buy across different fund houses for better diversification
Each year, you should sit down and calculate. How much percentage of your portfolio money is parked with a particular mutual fund house. Overexposure to a single one could be dangerous.
One tends to invest with a particular fund house either because their processes are good. Or because they have a star fund manager aboard or because you simply like the fund house. But fund managers could quit and processes could go awry.
Remember that if you have invested a substantial portion of your portfolio with a particular fund house. Ans if it does not do well one year, your returns will suffer.
Spread your money across different fund houses so that you can benefit from their different processes and methodology – this is diversification at play !.
4. Intra diversify your investments
This one could be missed very easily but is equally important. When you buy into equity or debt,there are also ways to diversify your investment portfolio using different parameters. Some quick examples could be :
- Make sure you diversify across different sectors of the industry.
- Make sure you have substantial spread between large caps, small caps and mid caps.
- Spread money across different debt instruments – gilts or corporate bonds for example.
- Go for balanced funds, tax saving funds (ELSS) or monthly income plans and not just equity diversified funds.
Last Word
Diversification is the most basic yet important tool in an intelligent investor’s hand. If used correctly along with asset allocation, it can be a powerful tool. One of the best ways to diversify your investment portfolio and achieve safe returns.
