Portfolio Diversification
What is Portfolio?
The list of companies and all the investments made by an investor is called a portfolio. A sensible investor does not keep all his money in one place , he invests in different companies and different categories to keep his money safe and earn good returns. Wherever and whatever the investment has been made , he keeps a list with him which is called Portfolio. Let's know about Portfolio Diversification.
In today's article, we will know what is Portfolio Diversification and what are its benefits. Also learn how as an investor we can diversify our portfolio.
WHAT IS PORTFOLIO DIVERSIFICATION?
Diversification means diversity. First of all it comes to saving, then it comes to investment, then we look for better investment options, then we want to earn continuous profit on the investment we make.
And to earn a consistent return on investment, we have to manage our investment portfolio in such a way that we also earn better returns from the investment. And our aim is to take the least risk with better and consistent profit.
Knowing some of the best ways you can build a diversified portfolio. To do this you have to invest in different companies and sectors. Instead of having multiple shares of just one company, you can buy shares of companies from different industries and sectors or diversify the sectors or industries in which you invest. For example, you may own shares in technology companies, automotive and banking companies so that if the automotive sector sees a fall in prices, your portfolio diversification will benefit from investing in other industries.
Portfolio diversification comes in the context of risk control with better expected and consistent returns. Portfolio Diversification is a way of controlling the potential risk in investment, by which investing in different investment options by dividing your total investment into different investment options according to your risk appetite.
Investing in different investment options according to your risk appetite is called Portfolio Diversification. With the help of portfolio diversification, better portfolio management and risk control can be done in investments.
Let us now know about the benefits of portfolio diversification :
Benefits of Portfolio Diversification
Control The Risk On Investment
None of us want to lose our investment capital or our savings money in the pursuit of more profit. That's why we all have to find investment options according to our risk appetite.
There is a popular saying about investing - Low Risk Low Profit, High Risk High Profit.
Most investments in which the Risk is low, the profit is also very less, and there is a fear of capital loss in high RISK. That's why we have to diversify our investment portfolio in such a way that we can earn better returns on Calculated Risk. And in such a situation, the portfolio diversification technique is very useful.
Taking Profit From Growing Sector
When we diversify our portfolio, some part of our capital is always kept in such sectors which are going to develop a lot in the near future.
In this way, we are able to take advantage of the benefits of different sectors of the business. Sometimes one sector becomes very slow after a lot of development like Real Estate. In such a situation, you should always choose such options through Diversification which are in Trend and are giving benefits.
If you talk about the stock market, then the company listed in the stock market belongs to different sectors. And in such a situation, sometimes Pharma Sector works well, sometimes banking and sometimes infrastructure.
So in such a situation, through our diversification, our effort should be that we can take advantage of the Growing Sector. If we say in two words, then we can take advantage of Trens from Diversification.
IMPORTANT : Although it is important to note that portfolio diversification is not a guarantee of risk free investment, you should always keep an eye on your investment portfolio, whether your investment is giving returns as per your financial goals or not, if not in that What necessary changes can be made.
How to diversify portfolio
Diversify the portfolio is completely dependent on our risk appetite and our knowledge and experience about different investment options.
Some of the steps to diversify the portfolio can be taken as follows -
First of all, we should set our investment goals and keep in mind how much return (ROI) we want to get from the investment. Then one should explore investment options for their stated and expected return (ROI).
Also keep in mind your RISK TO REWARD like if you can take 5% loss for 5% profit. Here is the risk reward Ratio of 1: 1, you must decide your risk and reward ratio.
In this way, you can invest in the investment options available to you on the basis of the risk reward ratio and the fixed return on investment.
For example, if your age is around 30, then you are in a position to take more risk and in such a situation, you can invest 60% of your investment in the stock market. The remaining 20% can be kept in Mutual Funds and the rest in Fixed Deposits.
Before making a portfolio, you must also take Term Insurance which can cover your life risk.
Advantages Of Portfolio Diversification
There are many other benefits of portfolio diversification:
- You can take advantage of compound interest.
- Facilitates monitoring of portfolio.
- Helps you to switch between investments.
- Helps to take advantage of investment in different types of company.
- Minimize the effects of market volatility and protects against losses.
- Protects long-term investment plans.
- You can keep your money safe.
You must do portfolio diversification to take advantage of the above mentioned great benefits. With Portfolio Diversification, you can invest in various growing industries and sectors to earn the best returns.
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