Rahul is a very aggressive investor . Unmarried and no liabilities, he has been allocating all his savings in equities. Although reads a lot on personal finance but nowhere he wants to left behind in creating a huge wealth for himself in a short period.
Rahul case is no different than ours. When it comes to investments, we follow our own personal finance analysis leading to the best ways we think can make money for us. One of the most prominent feature of our investment decisions is overexposure in a single asset class. We blindly take a path where the wind is blowing to reach faster than anybody else not realizing the impact if wind reverses its direction.
Diversification has been a great tool to protect our savings. Investing in various asset classes and not putting all your eggs in a single basket is the basic principle behind this strategy. As an investor, one should be well aware of some basics ideas and investment strategy before creating a diversified portfolio:
Exposure to a Single Stock: This is most prominent with retired individuals where they own a large amount of stock of a single company either through ESOPs or investing during young age. If the company fails financially, the retirement savings can even vanish. Thus, no matter how best the company performs today, betting on a single stock can be the highest risk game.
Different Investment Avenues: Although a diversified portfolio can be created by dividing investments into number of categories, there are some basic avenues which form the core of any diversification strategy.
a) Equities: It is an ownership you take in your investment. You can invest either directly in stocks of companies which fall in your parameters or through mutual funds. When investing in stocks directly, you need to make sure that number is large so that a bad performer does not affect your portfolio. For retail investor MF is the best route as investing directly may require large sum to invest. However, before investing in this asset class one should be aware that it carry its own risk and so should be considered only for long term goals.
b) Debt: Government securities and bonds are instruments which give you fixed interest till the maturity. The principal is returned once it matures. However, the bond/security is susceptible to interest rate risk and the price of the same will fall or rise with every increase or decrease of interest rate. Debt mutual funds invest in these instruments and so the return is impacted when interest rate scenario changes. Thus, through fixed income investing one can look at a steady income over the period.
c) Cash and Money Market: Savings account and money market mutual funds are primary investment options. Although you earn a certain amount of interest/return from these, the sole objective is to protect your capital. With high liquidity feature the investment option is suited for short term funds.
Asset Allocation: Equity, Debt and Cash, all three are very important tool for your savings but each one of them cater to a particular need of yours. Hence, right asset allocation strategy will balance your risk and return for your own situation.
Do it Yourself: It’s very difficult to assess your own risk profile and find the right mix.Your income needs,goals,risk tolerance and your life expectancy are factors considered for defining an asset allocation strategy.It’s better to work with a professional like Registered Adviser who will help in identifying the asset allocation which is suited for your situation.
What approach you follow for your investments? Are you concern about your investments?
Share your views in comments section..
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This and All the other Articles/Videos on this blog are for general Information and educational purposes and not to be taken as an Investment Advice. Any Action taken by Readers on their Personal finances after reading our articles or listening to our videos will be purely at his/her own risk, with no responsibility on the Writer and the Investment Adviser. Registration Granted by SEBI, membership of BASL and Certification from National Institute of Securities Markets (NISM) in no way guarantee performance of the intermediary or provide any assurance of returns to investors.