Investing in a number of asset types, such as direct shares, mutual funds, debt funds, fixed deposits, real estate, and precious metals like gold and silver, is one way to diversify your portfolio.
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Wealth Guide: There are many intriguing assets in the world, and there are many different ways to make money. Asset allocation is severely underrated, and diversification involves investing in a number of stocks. Investing in a number of asset types, such as direct shares, mutual funds, debt funds, fixed deposits, real estate, and precious metals like gold and silver, is one way to diversify your portfolio. Ashis Sarangi, a SEBI Registered Investment Advisor at Pickright Technologies, explains the benefits of portfolio diversification and explains why it is not a good idea to focus just on one asset class: -
"It's a common misconception that you should only invest in one asset class. However, the fact is that you can make money out of nearly anything if you are clever and resourceful enough. Consider that you want to make money using stocks in addition to your long-term investments in gold and silver. To protect yourself against the danger associated with the stock market, you can purchase a worldwide stock portfolio in addition to gold, silver, and other precious metals. Although choosing when to change from one to another is difficult, it is feasible. In fact, the majority of investors nowadays want to profit exclusively from stocks or real estate, "declaring Ashis Sarangi.
The benefits of diversification your investment portfolio only hold true, continues Sarangi, "if the underlying investments in the portfolio are not linked, which means they react to market forces differently, frequently in opposite ways.
He suggests the following benefits of diversification:
• Lessens the impact of market turbulence
• Supports multi-asset investment.
• Assist in reaching long-term financial objectives
• Promotes compound interest
• Assist you in avoiding a recession
He went on to say, "For risk diversification, one's portfolio must include allocations across a variety of asset types. Economic cycles differ for each asset type. For instance, interest rates and gold frequently behave in opposing ways, which can lead to profit or loss. Bond bear markets are often good for equities. Bonds, on the other hand, frequently perform poorly during a stock market bull run. Your portfolio will do well if it has a variety of asset types, even if some of those assets perform poorly."
If you don't have an emergency corpus, you should start one right away. The goal of an emergency corpus is to provide money when you lose your job, get sick, have a car accident, have a home fire, or have any other unexpected event that requires money. An emergency fund is different from the money you use every day. You want to keep most of your emergency fund in cash.
When investing in stocks, studies, and mathematical models, the best cost-effectiveness and risk reduction are achieved by maintaining a well-diversified portfolio of 20 to 30 companies. Portfolio diversification is the most fundamental and efficient way to reduce investment risk. A well-diversified portfolio contains a mix of stocks from different sectors and market cap. By doing this, you will still have some money in the stock market if the market in the particular sector you invested in declines, preventing you from becoming completely bankrupt. Significant gains will help balance losses in other equities, which is how diversification aims to smooth out unsystematic risk occurrences (non-market wide events) in a portfolio, he added.
(Disclaimer: Zee Business advises its readers to speak with their investment advisers before making any financial decisions since the opinions, ideas, and advice in this article are entirely those of investment professionals.)