Spreading your investments over a variety of asset classes limits your exposure to any one kind of asset. This is known as diversification. Over time, this strategy should help lower the volatility of your portfolio.
Understanding how to strike a balance between your time horizon and your comfort level with risk is one of the keys to successful investment. If you invest your retirement savings too cautiously when you are young, you run the danger that your assets will not increase at a rate that keeps up with inflation and that they will not reach the amount you will need in retirement. On the other hand, excessively active investment during later life may expose your funds to market fluctuations and reduce the value of your assets at a time when you have less options to recover your losses.
Diversifying your assets is one strategy to achieve a balance between risk and return in your investing portfolio. Although there are various variations on how to combine assets under this strategy, the fundamental concept is to distribute your portfolio across multiple asset classes. Your portfolio’s risk and volatility can be lessened by diversification, which may also lessen the frequency and intensity of stomach-churning ups and downs. Recall that diversity does not guarantee financial success or protect against loss.
Some Advice to Help You During the Volatility of the Market
Do not Invest a Whole Sum of Money
Now that we have a firm understanding of diversification, the first thing you should do is refrain from making lump sum investments. You can be tempted to invest a big sum due to low market prices, which appear lucrative. However, it can be detrimental to assume that the markets have reached their lowest point.
Because of the unique nature of the COVID-19 outbreak, the markets are extremely uncertain. Consequently, you run the risk of suffering enormous losses if you attempt to timing the markets and invest in a big sum and the markets decline even further. You need to invest gradually and keep an eye on how things change, even if you have a lump sum amount of money. During turbulent periods, it is best to park in a liquid instrument and transfer a portion of your funds to equity each week for a few weeks. This will allow you to average your purchase cost and ensure you have funds to buy cheaper if the markets decline much further.
Invest through Systematic Investment Plans in Mutual Funds and Direct Equity
Systematic Investment Plans, or SIPs, are by their very nature made for tumultuous markets. They make sure that, regardless of the state of the market, you invest a certain amount on a regular basis. Therefore, Rupee Cost Averaging helps you in the long run. In other words, you have a greater chance of making substantial gains and your average buying price decreases. You can avoid entering the markets at the wrong time by using it as well.
SIPs are a fantastic method to diversify your investments without running the danger of making an untimely market entry. You profit from regular investing even if the markets continue to decline. You are given extra units for the same amount of money. This could result in significant profits over the long run in your investment.
Put Money Into Stocks for a Longer Term
We so presume that you are aware of the following investments. One is avoiding lump sum investments, taking into account SIPs, and investing in securities with low correlation.
The investing horizon is the next crucial component of diversification during a volatile market.
For investors with limited time horizons, volatile markets pose a risk. While markets have always been turbulent, you can observe this by looking at the markets’ historical performance. They have bounced back from major corrective phases and crashes. Although previous performance does not guarantee future results, in the Indian market, markets and economies have an innate tendency to recover.
Invest in a variety of debt instruments.
When it comes to diversification, investors frequently place greater emphasis on stock. When it comes to debt investments, they either invest directly in debt instruments or select a safe debt fund without considering how the two are related.
It is crucial to diversify your debt assets given the state of the market and the economy today. Diverse debt funds are accessible for investment purposes. These consist of liquid funds, credit opportunities funds, income funds, dynamic bond funds, short-term funds, and ultra-short-term funds.
Examine your debt holdings and make investments in funds that are unrelated to your current holdings.
Conclusion
The main goals of diversity are to lower portfolio risk and increase earning potential. So, in order to have more time to accomplish your goals, it is preferable to start early. But diversifying your investments does not guarantee a return every time.
A well-designed diversification plan will minimize the chances of suffering losses. Consequently, use a diversified growth plan in line with your financial objectives to generate healthy returns free from concern for loss. Ultimately, effective risk management is the foundation of portfolio management, and return is the outcome of sound risk management.
