Many of us are often unilateral when it comes to managing money. Some risk-averse investors prefer FDs, some prefer mutual funds, while other brave folks put their money in retail stocks. Come to think of it; these savings and investment avenues are not at all a bad idea. But the debacle happens when you opt to park your money in just one of the above instruments. There can be either of the three consequences if you don’t diversify — Your money stays stagnant, or you make a fortune out of the investments, or you lose all your money to tough luck. This is why wise investors prefer to divide their money amongst various investment options and balance their portfolios.
Five tips for diversifying your portfolio
1. Consider different types of equity investments
If you are someone who only prefers to invest in retail stocks, consider diversifying by putting some of that money into mutual funds. There are innumerable investment vehicles when it comes to equities. Be it ETFs, ELSS, actively managed funds or smallcases, the options for you are endless.
2. Create an asset allocation strategy
Don’t limit your portfolio to equities. While it makes absolute sense to have a larger chunk of your portfolio in equities, do make space for other investment options like Debt, Reits, Commodities, and even Crypto if you have a higher risk appetite. But remember, do not bite more than you can chew.
3. Understand the risk associated with your investment
Usually, the higher the returns of an investment, the higher the risk. Don’t get carried away by speculative assets, and only invest as per your risk appetite. Let’s talk about the book, Psychology of Money, by Morgan Housel. To quote the bestseller, “Getting money is one thing; keeping it is another”. It is easy to accumulate wealth, but how long you can sustain it depends on how you evaluate risk and save your money from being a victim of heavy losses.
4. Go global with your investments
Giving your portfolio international exposure provides a safety hedge to the economic risk of your domestic country. For instance, the US stock market has a low correlation with the Indian stock market, and hence, when one performs poorly, the other gives better returns. The best part is you also earn in foreign exchange if your home currency depreciates.
5. Have a safety net
It is important to keep some money aside before investing. Financial experts advise having an emergency fund that can cover your expenses for six months. This way, even if your investments perform poorly, you have enough funds to sustain them. Also, ensure that your emergency fund is easily accessible. You can invest in a liquid fund or other debt instruments that have easy redemption.
How do you diversify your investments? Share your tips and tricks with us in the comments below. Happy Investing!