Diversification is the practice of spreading your investments around so that your exposure to any one type of asset is limited. This practice is designed to help reduce the volatility of your portfolio over time.
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One of the keys to successful investing is learning how to balance your comfort level with risk against your time horizon. Invest your retirement nest egg too conservatively at a young age, and you run a twofold risk: (1) that the growth rate of your investments won’t keep pace with inflation, and (2) your investments may not grow to an amount you need to retire with. Conversely, if you invest too aggressively when you’re older, you could leave your savings exposed to market volatility, which could erode the value of your assets at an age when you have fewer opportunities to recoup your losses.
One way to balance risk and reward in your investment portfolio is to diversify your assets. This strategy has many different ways of combining assets, but at its root is the simple idea of spreading your portfolio across several asset classes. Diversification can help mitigate the risk and volatility in your portfolio, potentially reducing the number and severity of stomach-churning ups and downs. Remember, diversification does not ensure a profit or guarantee against loss.
Tips to Help You Diversify During the Market Volatility
Avoid Investing a Lump Sum Amount
Now that we are clear about diversification, the first thing you need to do is avoid investing in a lump sum. Low market prices might seem lucrative and tempt you to invest in a lump sum. But, assuming that the markets have hit rock bottom can be counterproductive.
The markets are highly unpredictable as the outbreak of COVID-19 was unprecedented. Therefore, if you try to time the markets and invest in a lump sum and the markets fall further, you could suffer huge losses. Even if you have a lump sum amount, you must invest gradually while observing how the situation evolves. Ideally, park in a liquid instrument and keep moving some amount of money to equity on a weekly basis for a few weeks during volatile times, this will give you the benefit of averaging your purchase cost and you will have money to buy lower if markets dip further.
Invest in Mutual Funds / Direct equity via Systematic Investment Plans
SIP or Systematic Investment Plans are inherently designed for volatile markets. They ensure that you invest a fixed amount at regular intervals regardless of the market conditions. Hence, over time, you benefit from Rupee Cost Averaging. That is, your average purchase price comes down, and you have a better opportunity to earn handsome gains. It also saves you from entering the markets at the wrong time.
SIPs can be a great way to diversify your portfolio without the risk of entering the market at the wrong time. With regular investments, even if the markets fall further, you benefit. As more units are allotted to you for the same amount. With a long-term investment horizon, this could mean handsome gains.
Invest in Equities for A Longer Horizon
So, we assume that you are clear about investing in a few things. One is investing in securities having a low correlation, considering SIPs and avoiding lumpsum investments.
The next important aspect of diversification during market volatility is the investment horizon.
Volatile markets are dangerous for short-term investors. If you look at the past performance of the markets, you will see that while markets have always been volatile. They have recovered from crashes and huge correction phases. While past performance is not a guarantee of future performance, the inherent nature of the economy and markets is to bounce back, in the Indian market.
Diversify your debt investments
Investors tend to focus more on equity when it comes to diversification. With debt investments, they either choose a debt fund that is secure or invest directly in some debt instruments without thinking about the correlation between them.
In the current market and economic conditions, it is important to diversify your debt investments too. There are various debt funds available for diversification. These include income funds, dynamic bond funds, liquid funds, credit opportunities funds, short-term funds, and ultra-short-term funds.
Analyse your debt portfolio and invest in funds that have no correlation with your existing investments.
Takeaway
The primary reason for diversification is to get an opportunity to earn more and to reduce the risk of a portfolio. Hence, it is better to start early to have more time to reach your goals. However, diversification of investment does not assure you profit at all times.
A proper diversification strategy will lower the risks of losses to a minimum. Therefore, have a diversified growth strategy, according to your financial goals and earn good returns without worrying about losses. After all, portfolio management is about managing your risks well & Return is a by-product of a well-managed risk.
