Investing from an early age in a smart, disciplined and consistent manner is the best way to grow your wealth. Intelligent investing is done through the diversification of your portfolio, which minimizes the risk of your investments over the long term.
Diversification can be done by incorporating certain high-risk, high-return investments in a portfolio that also contains stable low-risk, low-return investments. Stabler investments are less reactive to market volatility and therefore offset the risks associated with the more volatile high-risk investments.
As you continue investing, you begin to realize the importance of disciplined saving and the value it creates over a certain period of time. Investments can be a mix of cash, equity, bonds or G-secs (government securities). Once you have gained enough experience with diversification, you can even foray into international markets and invest in real estate.
Here are some pointers that will help you diversify your portfolio:
1. Understand why diversification is essential:
The purpose of diversification is to absorb financial shocks caused by disruptions in the overall economic growth. It balances your portfolio through multi-sector investments or multiple asset classes and offers many options even within each class of security.
Wise investing involves parking money in different industries across sectors, leveraging interest plans and various tenures. E.g., all your hard-earned money must not be invested solely in the banks or only in IT, although the sector may be performing well through the COVID-19 pandemic. Put your money into upcoming sectors that are witnessing a robust pace of growth.
2. Asset Distribution:
Basic investing primarily covers two asset classes – stocks and bonds. Stocks are considered to be high-risk, high-return investments whereas bonds are stabler with low risk and low returns. Your exposure to risk is minimised by distributing your investments between these two asset classes.
Asset distribution is mainly associated with age and risk-taking appetite. The youth can sustain higher levels of risk and therefore prefer to park their money in stocks that offer quicker returns. A quick tip – subtract your age from 100 and use it as the percentage of your money that should be invested in equity. E.g., at 30, 70 percent of your money should be invested in stocks and 30 percent in bonds.
3. Assess qualitative risks of the asset class before investing:
You can delve deeper into the quality of stocks by examining various parameters that are not technical in nature. A stock can be rated based on its performance history, the integrity of the leadership, corporate governance practices, CSR initiatives, brand value, compliance with the norms, reliability of the product/service offering and the competitive advantage it has over its peers. These factors can help you decide whether the organisation’s values are aligned with yours and subsequently whether you should invest in it or not.
4. Money market securities can help you liquidate faster:
Instruments in the money markets include Certificates of Deposit (CDs), Treasury Bills (T-bills) and Commercial Papers (CPs). This asset class offers the advantage of faster cash conversion. These are also low-risk securities and are therefore a safe investment.
Of the above 3 securities, T-bills are the least volatile and therefore nearly risk-free. They can be purchased individually and are issued by the Reserve Bank of India (RBI). Backed by the central government, these are some of the most secure investment options available. All G-secs are known for their security and not their rate of return due to their insulation from market volatility. G-secs are a great way to offset the risks associated with equity investments.
5. Invest in bonds that offer reliable cash flows:
Mutual Funds (MFs) are typically viewed as reliable and stable investment options. Nonetheless, within the MFs, are various other investment options based on your needs such as investment, redemption, and interest accumulation.
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Your money may be untouchable when locked in a savings plan. To mitigate this problem, consider putting some money into MFs with a consistent cash flow, also known as Systematic Withdrawal Plans (SWP). This investment offers a periodic withdrawal on a quarterly or monthly basis.
Systematic Transfer Plans (STPs) are another option wherein a fixed amount can be shuffled between different mutual funds. These add a balance to your portfolio.
6. Use a buy-hold strategy:
An investment plan is a saving plan for the long term which means knee-jerk reactions must be avoided. This means the focus is not on the trading of stocks, but on a buy and hold strategy. Equity yields good returns over a long period, thus allowing your wealth to grow. Unlike intraday trading which leverages market volatility to make gains, this is a more passive approach and also a much safer way to ensure gains. Do not hesitate to let go of a part of your holdings that appreciate too quickly either as a market correction usually follows such rapid upticks. Keep averaging your cost by purchasing on dips with the profits you book.
7. Research the factors which influence the financial markets:
Financial markets are a mix of stock exchanges, bond markets, foreign exchanges, money markets and interbank markets. Just like any other marketplace, supply and demand govern these markets too. External factors such as policy changes, economic performance and RBI announced interest rates, etc are all a part of the list of factors that could swing these markets either way. A thorough understanding is therefore important.
8. Try Systematic Investment Plans (SIPs):
If financial constraints are plaguing you, there is no need to worry. A small amount invested in a SIP is better than a large amount invested in the same. This method ensures that you invest a fixed amount of money in MFs at fixed intervals of time. It works perfectly for investors who cannot access large sums at once.
Diversification is key even in SIPs. Make sure your investments are well spread.
In India, the people’s relationship with money is quite conservative due to the high inflation rates and stagnant incomes. The only way to grow wealth is through security investments. In order to get that right, diversification is critical to protect one’s hard-earned money from eroding in value. An early start coupled with consistency and wise investing can stabilise you financially over time.
The author, Rachit Chawla, is CEO and Founder at Finway FSC. The views expressed are personal