We all understand the benefits of having a diversified portfolio. Portfolio diversification is not about dividing our money among equities under different market capitalizations. It is also about allocating a part of our earnings to debt, bank deposits, gold, real estate, and more.
Not many people know how to divide their investments or how to apportion regular income into various asset classes. Many go by the thumb rule for asset allocation that advises investors to deduct age from 100 to derive the equity allocation proportion.
For example, if you are 30, then you must put 70 per cent of your earnings into equities according to this formula. You can then put your remaining money into debt and gold that would make up for the rest of your portfolio.
Another way out is to divide according to your risk appetite. For example, there is too much volatility in the stock markets resulting in share prices rising and falling with equal gusto. This explains many people rushing to buy gold as an effective hedge against inflation.
Some prefer physical gold while others prefer investing in the metal through bonds and exchange-traded funds (ETFs). However, some look at debt as a possible investment option owing to the lack of volatility or constant returns owing to its fixed nature.
Many inquire about how to build an investment portfolio with passive investment options in them. This means how to choose their investments acting on passive core strategies that need not be managed or shuffled regularly.
However, putting money in passive investments does not mean that one cannot park earnings in active funds or cannot decide their choice of debt instruments accordingly. This means that investors may choose between large caps, midcaps and small caps depending on what kind of growth they yearn for.
A lot depends on your investment tenure. If you are inclined to stay put in the markets for the next 20-30 years, you may put 50 per cent of your earnings in the large-cap and mid-cap space. Small-cap funds are relatively volatile, which is why many investors exit these funds after a decade or so.
However, a patient outlook can help you create an enviable corpus over the next 20 years through investments in small-cap funds. However, if you are looking for benefits from the movements of both large and mid-cap funds, putting money in flexicap funds will help. So, after deciding on their asset allocation, an investor must decide where to invest their money.
Apart from equities, investors have a lot to choose from in the debt component too. Even passive investors can choose between money market exchange-traded funds, target maturity funds and fixed-income instruments. Regarding investing in metals, you may opt for gold and silver ETF investments through Demat accounts.
With so many choices regarding investments, it is obvious that investors have a lot to choose from. However, instead of being random about their finances, it serves best to seek the services of a professional financial advisor. These people will first gauge your risk appetite and sync the same with your financial goals to tell you what kinds of investments you must opt for.