This Holi, get the brightest colours in your portfolio

Holi, the festival of colors celebrated across India, brings along a sense of joy and festivity. What makes it such a lively and vibrant celebration is the addition of multiple colors, each making the surroundings more enjoyable. But just like any other aspect in life, moderation is important. Too many colors can hinder the celebration, and instead of enhancing one’s experience it can cause chaos.

This principle applies to more than just a festival, it applies to life in general. In the financial world, diversification of portfolio is equally significant. A well-balanced portfolio is essential for maximum returns, however, there are a few factors to keep in mind before taking the plunge on a diversified portfolio. Let’s look at the importance of creating a portfolio that can give you maximum returns while being able to sustain in the long-term volatility of the markets.

Getting To Grips With Portfolio Diversification

Portfolio diversification is the process of including different asset classes in a portfolio. These asset classes consist of stocks, bonds, commodities and cash. Depending on the objective of your portfolio, a combination of different asset classes can be included to achieve the desired results.

These diverse asset classes come with their own set of advantages and disadvantages. For instance, stocks are more volatile and can generate higher returns, whereas bonds are less volatile and generate steady returns. So, an ideal portfolio should have a combination of these assets to generate maximum returns from both asset classes.

Benefits Of Diversifying

When it comes to diversification, it is important to understand that there is a limit to it. As an investor, invest only up to a certain level of your capacity to bear risk. Once you reach that level, any additional investments could bring in additional risks and jeopardize returns.

The major benefit of diversifying your portfolio is that it helps in managing risk. Investing in multiple asset classes minimizes the risk of losses due to downturns in the market. Another major benefit of diversifying is the higher returns generated. Investing in different asset classes, each with different return levels, increases the overall returns of the portfolio.

The Financial 'Colour Palette': Understanding Different Asset Classes

Investing can be a powerful tool to create wealth and meet your financial objectives. For any investor, it is important to have clarity of investment goal and an understanding of the various aspects of diversification that can be applied.

Next, an investor should determine the allocation to various asset classes like equity, fixed income and alternate assets such as gold, REITs and InvITs.

If you are an aggressive investor looking for long-term capital appreciation, you might want to allocate a higher percentage of your portfolio to equity (80%), and have a balance between fixed income and alternate assets. In comparison, if you are a conservative investor who wants to conserve capital and generate regular income, you would primarily allocate to fixed income (50-60%), while balancing equity and alternates into the mix.

You could also undertake a further level of diversification within asset classes; for example, an aggressive portfolio would mainly consist of small and mid-cap companies with some allocation to large cap.

Conservative investors meanwhile should primarily invest in large cap within their equity exposure, while considering some small and mid-cap based on the investment period.

When it comes to fixed income, the quality of credit and taxation becomes important criteria to consider. Usually, a mix of fixed deposit instruments and high credit quality fixed income mutual funds can be beneficial. Government schemes like Public Provident Fund and Senior Citizen Savings Scheme can be considered, but taxation and liquidity factors should also be taken into account.

Alternate assets can also bring in good diversification into the portfolio, while generating regular income. Sovereign Gold Bonds can be an efficient way of investing in gold for the long term, while REITs and INVITs can also be explored.

Striking the Right Balance for Investment Success

Realizing financial success through investments requires a deep understanding of the different asset classes, investment tools, and market dynamics. Investors need to be mindful of the variables that can impact their investments in order to make wise decisions and construct a portfolio with the potential to generate maximum returns.

Reaching the Ultimate 'Vivid Experience'

When correctly constructed, a portfolio of diverse assets and investments has the potential to generate strong returns and create the ultimate 'vivid experience' when it comes to investment success. By taking the time to understand different asset classes and tools available, you can make informed decisions that will help you maximize your portfolio’s potential and attain your investment goals.

Abhisek Puglia is Chief Business Officer, MarketsMojo