Is your portfolio diversified? Here’s your checklist!
IThe volatile nature of the stock market makes investing a risky affair, and one of its vital counterbalance strategies is portfolio diversification. Is your portfolio diversified? Well, here’s your go-to checklist!
What is Portfolio Diversification?
Portfolio diversification is a strategy of risk management used in investing, which allows you to reduce risks by allocating your funds to multiple asset types. This ensures that your assets are not exposed to high risks, but generate high enough returns at the same time.
Components of a Diversified Portfolio
The primary components of a well-diversified portfolio include:
Bonds, Stocks & Mutual Funds
Short Term Investments Commodities Foreign Assets Real Estate Funds Sector Funds
Advantages of Portfolio Diversification
It shock-proofs your portfolio.
It generates return opportunities across various sectors.
It allows you to mitigate risk.
Disadvantages of Portfolio Diversification
Over diversifying your portfolio can lead to below-average returns.
Researching and keeping a tab on their performance is a timeconsuming affair.
With multiple stocks, you would also incur more transaction fees. This can increase your overall cost of investing.
Tax structures are not the same in all asset classes, which causes complications if you have ventured into multiple segments.
Things to Consider Before Diversifying Your Portfolio
Now that you know all the advantages and disadvantages of portfolio diversification let us go through a few things to consider before delving into portfolio diversification.
Reduce Your Risks
Spread your portfolio across asset classes. However, do thorough research and due diligence on each instrument and scheme before doing so.
If you feel managing your portfolio is challenging, approach a certified professional who can guide you through it.
Understand Your Goals
Understanding your investment purpose will ensure that your money is in the right place and you are not overly exposed to risks.
For example, if you are investing money in equity funds but your shortterm goals, you may have a problem because equity funds tend to perform best in the long term and give you higher returns.