Hello Readers!
When people hardly take interest in allocating a good amount in highly valued equity assets, but at the same time, they do not want to fix the growth of their money by putting them in the low yielding fixed return assets, here Diversification feature of portfolio plays the trump!
Those who have experienced market cycles will know that no one asset or within that, no one theme can consistently outperform at all times.
When you will go through thorough research and analysis, you will find that there are years when fixed deposits gave high returns, and then there are years when they don’t give good returns. Similarly, gold performed well in some years, while in some it didn’t. Basically, it’s impossible to predict when one asset or a theme with it is going to do well, and that why experts advise go diversifying your portfolio, it plays a key role, in both, making your portfolio strong and fetch good returns.
The question then arises, how many assets do you need to diversify adequately? The answer is not a numeric value, rather, depends on your investment goals and time horizon.
Linking Asset Choices To An Outcome
Well, basically people invest for two purpose, either to get a regular income or creating good wealth. So basically, when they will look for an option to invest, it will include assets that can achieve either of the two goals. If a person is looking towards wealth creation, they will automatically have a higher allocation to assets that offer good returns, and if they are looking for a regular income, they will look at products that offer fixed returns.
Fixed return financial products will include fixed income, gold (sovereign bonds), and real estate. The question is should one go for all?
Well, basically not, if you are looking for a regular income from your investment, then choosing more than two financial products for one goal is not appropriate.
Then, what to choose for regular income from these? Well, this can be analyzed with simple examples. Firstly, acquiring real estate for the purpose of generating regular income through rentals is a transaction that requires heavy investment and a very long-time horizon. Gold bonds too come with a long-term horizon as your money is locked in for seven years.
Now you are left with debt or fixed income. There are a few product options here which you can diversify across depending on the amount you wish to invest, the safety, liquidity, cost, and time frame. The ideal options for your diversification for regular income goals bank and corporate deposits, debt mutual funds, small savings schemes, and government bonds.
Can Past Return Be a Reason To Diverse?
If your returns in the previous year were not good and this year, maximizing your return is the only objective you seek, to diversify your portfolio, then I suggest you rethink. Diversifying only for high returns can prove to be very difficult.
Including more than one kind of asset in your portfolio helps balance out risk and return. When one asset falters, the other choices kick in to deliver growth, but having only one kind of asset is not the true meaning of diversification. Relying on past returns can be a dangerous way to approach diversification.
Mutual Fund Diversification basically refers to the asset allocation in one’s investment, which aims to reduce the risk in investments. Investing in different categories of mutual fund schemes, helps you increase the growth possibility and help in managing the potential risks.
For any kind of query you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
Happy Investing!
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).