How to Diversify Your Portfolio: 5 Investment Tips for you.

If you are just getting started on your investment journey, you may find yourself favouring one type of asset or asset class over others. For instance, if you are eager to grow your investment corpus significantly, you may prefer to invest all your money in the equity market. But if you are more focused on preserving your capital, you may prioritise debt securities or deposits.

However, it is never a good idea to put all your money into one asset. If that asset does not grow or deliver as expected, you could lose most or all of your capital. What you need instead is a diversified investment portfolio that distributes the risk across different asset classes.

5 Tips to Diversify Your Investment Portfolio

Not sure how to diversify your portfolio in a manner that facilitates easy achievement of your financial goals? These tips and techniques can help you.

1. Assess Your Risk Profile

Your risk profile determines the nature of diversification in your portfolio. If you prefer low-risk investments and prioritise capital preservation, your portfolio may be more debt-oriented. But if you are a more aggressive investor, you may prefer to invest more heavily in equity. The proportion of investment in different assets will vary, which brings us to asset allocation.

2. Determine the Ideal Asset Allocation

Your asset allocation is how you distribute or allocate your capital across different assets and asset classes. You can make use of online tools like an Investment Calculator to determine the potential returns you could get from different assets. This makes it easier to decide the ideal asset allocation that aligns with your goals and risk profile.

3. Diversify Across Investment Horizons Too

Portfolio diversification also involves including assets and investment schemes with different investment horizons. If you only focus on long-term goals, you may not have the funds needed for short-term targets (and vice versa). So, you need to invest in short-term, medium-term and long-term assets to fulfil various financial goals with different timelines.

4. Rebalance Your Portfolio As Needed

As the values of different assets in your portfolio grow or decline, your asset allocation will change over time. So, you need to review your portfolio periodically and check if your assets are still allocated as per your preferred ratio. In case of any changes, you must rebalance the portfolio to restore the original asset allocation. This exercise also helps you adjust your investments as per your changing risk preferences.

5. Include Life Insurance

Many investors fail to understand the importance of a life cover until it is too late. You can avoid this mistake by purchasing an adequate life cover in your 20s or 30s to lock in lower premiums. Life insurance plans also help you achieve a wide range of other life goals in addition to protecting your family. For example, ULIPs combine insurance and investment benefits, while pension plans give you a life cover and post-retirement income.

Conclusion

If you are not sure about any specific strategy, always take the time to understand it and evaluate if it works for you before you implement it. Make use of free online tools like the investment calculator, retirement planning calculator and more to customise your portfolio as needed. In case you are still unsure about how to proceed, it is a good idea to seek expert guidance from a financial advisor.  

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