Holi, the festival of colors celebrated across India brings with it a sense of joy and celebration. What makes it such a lively and vibrant celebration is the addition of multiple colors that make the setting more enjoyable. But like every other aspect of life, moderation is important. Too many colors can hinder the celebration, and instead of enhancing the experience, they can create chaos.
This principle doesn’t just apply to a festival, it applies to life in general. In the financial world, portfolio diversification is equally important. A balanced portfolio is essential for maximum returns, but there are a few factors to consider before taking the plunge into a diversified portfolio. Let’s take a look at the importance of creating a portfolio that will give you maximum returns while being able to weather the long-term volatility of the markets.
Get portfolio diversification under control
Portfolio diversification is the process of adding different asset classes to a portfolio. These asset classes consist of stocks, bonds, commodities and cash. Depending on the goal of your portfolio, a combination of different asset classes can be included to achieve the desired results.
These different asset classes have their own pros and cons. For example, stocks are more volatile and can produce higher returns, while bonds are less volatile and produce stable returns. So an ideal portfolio should have a combination of these assets to maximize returns from both asset classes.
Benefits of diversification
When it comes to diversification, it’s important to understand that there are limits. As an investor, only invest up to a certain risk-bearing capacity. Once you reach that level, additional investments could introduce additional risk and jeopardize returns.
The main benefit of diversifying your portfolio is that it helps with risk management. Investing in multiple asset classes minimizes the risk of losses due to market downturns. Another major benefit of diversification is higher returns. Investing in different asset classes, each with different levels of return, increases the total return of the portfolio.
The financial “color palette”: understanding different asset classes
Investing can be a powerful tool to create wealth and achieve your financial goals. It is important for any investor to have clarity about the investment objective and to understand the different aspects of diversification that can be applied.
Next, an investor should determine the allocation to different asset classes like equities, fixed income and alternative assets like gold, REITs and InvITs.
If you’re an aggressive investor looking for long-term capital appreciation, you may want to invest a higher percentage of your portfolio in equities (80%) and have a balance between fixed income and alternative assets. In comparison, as a conservative investor looking to conserve capital and generate regular income, you would invest primarily in fixed income (50-60%), while adding equities and alternative investments to the mix.
You could also add another level of diversification within asset classes; For example, an aggressive portfolio would consist primarily of small and mid-cap companies with some allocation to large-cap companies.
Meanwhile, conservative investors should invest primarily in large caps within their equity exposure and consider some small and mid caps depending on their investment horizon.
When it comes to fixed income securities, credit quality and taxation are important criteria to consider. As a rule, a mix of fixed-term deposit instruments and fixed-income investment funds with a high credit rating can be beneficial. Government schemes such as the public provident fund and pension schemes can be considered, but taxation and liquidity factors should also be considered.
Alternative assets can also bring good diversification to the portfolio while generating regular income. Government gold bonds can be an efficient way to invest in gold for the long term, while REITs and INVITs can also be explored.
Finding the right balance for investment success
Realizing financial success through investing requires an in-depth understanding of different asset classes, investment vehicles and market dynamics. Investors need to be aware of the variables that can affect their investments in order to make wise decisions and construct a portfolio with the potential to generate maximum returns.
Achieving the Ultimate “Living Experience”
When constructed properly, a portfolio of diverse assets and investments has the potential to generate strong returns and create the ultimate “living experience” when it comes to investing success. By taking the time to understand different asset classes and the tools available, you can make informed decisions that will help you maximize your portfolio’s potential and achieve your investment goals.
Abhisek Puglia is MarketsMojo’s Chief Business Officer
Portfolio rebalancing involves changing the weighting of the assets in the portfolio.
