The first step to making an investment is carefully selecting your choice of investment option, but it doesn’t end there. The other crucial step that many novice investors may miss out on is portfolio diversification. You may be aware that a diversified investment should be a combination of different assets for your funds to be divided appropriately.
If you opt for some risk investments, as per your risk profile, it is also important to include a term policy or guaranteed1 savings plan in the mix by choosing from various insurance plans in India. However, this does not mean that you save in several types of schemes, funds and life insurance policies for the sake of diversification. Over-diversification in your portfolio can pose other problems, which you can know more about in this article.
That being said, this is how you can use portfolio diversification to meet all your financial obligations and goals.
What is the Goal of Portfolio Diversification?
A well-managed portfolio is essential if you want to help your investments and your wealth grow. There are systematic risks that can be curbed through portfolio management and diversification. Since portfolio diversification reduces risk, it is known to be an effective risk management strategy that most financial advisors, fund managers and financial experts recommend.
The main reason for investing money is so that you can create a wealth corpus and use it to fulfil your financial obligations. When it comes to life insurance in India, your diversified portfolio should comprise a life insurance plan that can be chosen as per your insurance needs.
Depending on the investment amount, the funds and the returns can be used for various purposes, such as a retirement fund, an emergency fund, for your child’s further education or lifestyle needs, donating to noble causes, or starting a new business.
Importance of Portfolio Diversification for Fulfilling Goals
Portfolio diversification is important for all types of investors, irrespective of their risk profile and their investment strategies. The main aim of diversifying your portfolio should be to minimise as many risks as possible so that you can grow your wealth to meet all your financial goals. These are some of the ways in which the benefits of portfolio diversification enable you to plan and meet your objectives:
- Stability in your portfolio
Investing in different avenues makes it easier for you to know your investments better, and in the long run, you will be able to allocate the funds suitably across all your investments. Since the fund allocation is important, this can make your portfolio stable and help you decide how you can best fulfil your goals. For instance, a life insurance plan with guaranteed1 savings returns can be used to fund your child’s education without disrupting your other investments.
- Security for your family
Certain additions to your investment portfolio, such as a savings insurance plan or a pure term plan, comes with a protective life cover that can secure your family’s financial needs in case of your untimely death during the policy term. While pure protection term plans do not offer any direct monetary returns, you should still make it a part of your financial planning because the death benefit can come to your family’s aid in the future.
- Balanced investment risks
When you invest across various asset classes, you can decide on your long-term and short-term goals to select the appropriate investments for both. For example, a savings insurance plan for a policy period of 15 years can help you fulfil your long-term financial goals after you receive the policy benefits, and if you choose a short-term mutual fund, you can meet certain financial needs at the end of 1-3 years.
- Expand to foreign investments
If possible, try and make some foreign investments such as buying foreign stocks so that you can add these to your portfolio as well. This will help expose your investment to foreign investments, smoothen out the geopolitical risks that economies face and give your investment a better opportunity for future growth. If you are worried about currency volatility, then note that it does not always mean that you have to incur losses.
- Range of Investment Options
By planning your goals, you can explore your investment options and pick some opportunities and plans that will help you meet your financial obligations. You need not have all investment plans in your portfolio, but with more options, you can utilise funds from one investment for one specific goal. For example, a Unit-Linked Insurance Plan can be a good choice for a child education plan, where the 5-year lock-in period and the market returns boost the investment.
To give your portfolio the growth, security and diversification it needs, you can choose life insurance plans Tata AIA Life Insurance Company as per your requirements and those of your family.i
Most investors may not be aware of how portfolio diversification works. In such situations, it is advisable to seek the assistance and expertise of a financial consultant who can guide you on the subject. Portfolio diversification also works on a smaller scale where the funds and assets under a particular investment can be further diversified to combat market risks.