Investors usually make investments in assets that offer high returns, but it could lead to putting all the eggs in one basket. Based on the risk-return basis, an investment offers high returns particularly when it is having high risk. Here comes the need of having a diversified portfolio. Investors having a well-diversified portfolio, spread across asset classes, escaped market mayhem as against those who focus only on one or two investment assets.
A diversified portfolio contains a mix of different asset types which helps to minimize the risk of investing in a single asset. It is a key to maintain risk levels at the lowest and make an effective investment plan. Based on the market movement, a diversified portfolio help to distribute financial risk across different instruments and different industries to maintain a balance.
Age-Wise Financial Goals and the Risk they entail
Before creating a diversified portfolio, it is essential to understand the goals you want to achieve at various stages of your life. For instance, In the early 20s, you might have just started your career, the primary goal at the time will be to pay off any education loan taken at the earliest.
As you advance in your career, you plan for a family, then the primary goal shifts to providing robust financial protection to your family and manage funds to meet children’s higher education and any emergency, without losing sight of your retirement. By the time of the 50s, you would have paid most of your debt and your children would be on the verge of completing their education. Based on the requirement of each stage it is essential to plan and diversify your portfolio to meet the goals.
Marrying Diversification with Life Goals
The basic goal of diversification is to minimize risk, have an optimal asset allocation to help you meet your life goals with ease and aid in wealth creation. In your early 20s, when your risk appetite is high, a sizable portion of this portfolio should be tilted towards equities.
While focusing on wealth creation, children’s higher education and your retirement, bank on equity mutual funds and invest through systematic investment plans (SIPs). Since these goals are long-term in nature and need to factor in inflation, equities are the best option.
The National Pension System (NPS) is a judicious option for making a retirement plan as it provides tax benefits as well the choice of investing across asset classes, as per risk tolerance.
Diversification with Progression in Age
Diversification isn’t a one-time exercise. You must periodically review your portfolio and make the necessary changes to your existing asset allocation. This becomes all the more important as you age, because of your priorities and risk tolerance change.
