As the phrase goes- Do not put all your eggs in one basket. When it comes to investing in the stock market, we should take this more seriously! What we mean is that you need to have a diversified portfolio because it is a sure-shot way of avoiding the risks that come with the stock market.
For Indian investors, who have a variety of options when it comes to investing, diversifying is ideal. But why is diversification so important, and how can it be done? We’ll look at exactly this in our blog, and by the end, you’ll have a clear understanding of how to diversify effectively.
Getting to know diversification better
When you have your money invested in just one kind of asset, your returns become entirely dependent on that. Diversifying means putting your money into different financial instruments, industries, and other categories. This helps you avoid over-concentration on a single asset or risk. Basically, your portfolio will not be too vulnerable to market volatility and risks.
Why diversify?
If we had to briefly put it, it helps with:
- Risk Reduction: Your risk gets distributed among different asset types, so if one investment performs negatively, it does not hurt your overall portfolio returns.
- Easier Returns: Investing across different asset types can give you stable returns in the long haul.
- Growth Opportunities: Different sectors and markets have different growth opportunities. When you diversify, you can cash in on each one.
- Protection Against Market Volatility: Different assets behave differently in the market. A diversified portfolio can, therefore, act as some form of protection from market volatility.
- Flexibility: Diversification gives more leeway to adjust the portfolio when the market shifts or your financial goals change.
Strategies for Diversification
Diversifying Across Asset Classes
One of the most basic ways to diversify is across different asset classes. The main asset classes include equities, bonds, real estate, and commodities.
Equities: Investing in stocks brings high returns along with higher risks. Stocks of big Indian companies like Reliance Industries and Infosys can provide an opportunity for growth.
Bonds: Stocks are risky but bonds are relatively safe and can bring you periodic returns. You can choose between a bond issued by the Indian government or corporate bonds from reputed companies like HDFC.
Real Estate: You can trust real estate investment to guard yourself from inflation, and it will also give you rental income. For example, investing in property in Bangalore or Pune—because they are growing cities.
Commodities: Gold and silver are good bets against market meltdown and inflation. You can consider investing in gold through ETFs or sovereign gold bonds in India.
Diversifying Within Asset Classes
A single asset class can be varied. You can strengthen your portfolio by diversifying within an asset class. Basically, it means investing in a variety of sectors, industries, or diverse geographical regions.
Equity Diversification: Within equities, consider to invest in many sectors like technology, healthcare, finance, and consumer goods. An example would be TCS in IT, Dr. Reddy’s Laboratories in healthcare, and ICICI Bank in finance.
Bond Diversification: You can diversify within bonds by investing in government bonds, corporate bonds, and municipal bonds. Doing so, you’re not prone to risks that arise from depending on a single issuer.
Real Estate Diversification: There are different types of real estate—residential, commercial, and industrial—and their values vary. Diversifying across these can reduce risks.
Geographic Diversification
Each region has its own risks. When you invest in multiple geographies, it protects your portfolio against one country’s risks. Indian investors may invest in international markets through mutual funds or ETFs that focus on global equities.
Example: Many international mutual fund contain US tech stocks like Apple and Google, European companies like Siemens, and other emerging market stocks. This is an ideal choice if you want to diversify.
Sector Diversification
The state of the economy influences how each sector performs. It can be highly varied. Investing in several sectors will protect you against sector-specific downturns.
Example: If you remember the COVID-19 pandemic, technology and healthcare sectors performed really well. But the travel and hospitality sectors suffered. So, when you diversify across sectors, the overall performance of your portfolio can be balanced.
Investment Style Diversification
The different kinds of investing styles are growth, value, and income investing. When you combine these styles, it is possible to get a balanced portfolio.
Growth Investing: Focusing on companies that are expected to grow at a faster rate than what’s average. For example, investing in high-growth Indian start-ups and technology companies.
Value Investing: An undervalued company can have strong fundamentals. Investing in such companies can be considered. For example, buying shares of established companies when they are at market lows.
Income Investing: There are some kinds of investments that provide regular income, such as stocks that pay dividends or bonds. For instance, investing in companies like ITC or NTPC that offer high dividends.
Examples of Diversified Portfolios
Example 1: Balanced Portfolio for a Conservative Investor
Asset Class | Allocation | Investments |
Equities | 30% | Large-cap stocks (e.g., Reliance Industries, HDFC Bank) |
Bonds | 50% | Government and corporate bonds (e.g., Indian government bonds, HDFC corporate bonds) |
Real Estate | 10% | Real estate investments (e.g., REITs) |
Commodities | 10% | Gold (e.g., Gold ETFs) |
Example 2: Growth-Oriented Portfolio for an Aggressive Investor
Asset Class | Allocation | Investments |
Equities | 60% | Large-cap, mid-cap, and small-cap stocks (e.g., TCS, Biocon, emerging start-ups) |
Bonds | 20% | Corporate bonds (e.g., Aditya Birla Sun Life Corporate Bond Fund) |
Real Estate | 10% | Real estate investments (e.g., direct property investment in Bangalore) |
Commodities | 10% | Gold and silver (e.g., Sovereign Gold Bonds, Silver ETFs) |
Here’s some tips for diversifying your portfolio.
Assess your risk tolerance: Think carefully about your risk tolerance. The right kind of diversification depends on this. If you’re a conservative investor, you may want a higher allocation to bonds and real estate. If you’re the aggressive kind, you may want equity and commodities.
Set clear financial goals: When your financial goals are clear, you can decide the right asset mix. For example, if the aim is long-term growth, allocating to growth stocks could be appropriate. If you desire regular income, dividend-paying stocks and bonds could be better.
Review your portfolio regularly: When you keep a close eye on your portfolio, you know if it is performing according to your goals. You can correct it if it’s not the case. This could mean selling overperforming assets and buying underperforming ones from time to time to maintain your asset allocation.
Use mutual funds and ETFs: Mutual funds and ETFs are known for pooling money from all kinds of investors to invest in diversified assets. For example, an index fund tracking Nifty 50 gives an individual exposure to 50 of the biggest companies in India.
Consult a financial advisor: A financial advisor, after a more personal analysis of your financial situation, can advise on the best way to diversify. They will show you the most appropriate way to select an asset mix and further ensure that your portfolio is well diversified.
Now you know that if you want to manage risks and ensure stable returns in the stock market—you have to diversify! Choose among the various strategies we’ve discussed and ensure you have a good, diverse portfolio that ensures sustained returns.
