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In this policy, the investment risk in the investment portfolio is borne by the policyholder.
Kotak e-Invest
Features
Ref. No. KLI/22-23/E-BB/492
When it comes to managing your investments, portfolio diversification is the key to successful financial management. Diversify intelligently to balance market volatility.
Portfolio diversification is the process of modifying your portfolio so that your returns are not affected by sudden changes in the market. It helps you increase your spectrum of profits by allowing you to invest in different plans as per your choice.
One of the best ways of wealth accumulation is investing wisely and staying in sync with the markets. Along with amassing your wealth, this will also help you achieve your long-term financial goals. But the main question is, “What should you invest in?”. Well, there is no specific or generalized answer for this. However, one investment strategy can help make wise investment decisions: diversification.
Many financial experts believe that diversification is the key to investing, regardless of your financial goal. It may sound complicated, but it is an essential concept that every investor must follow as a principle for investment.
Financial portfolio diversification is the process of spreading your investment around using different financial tools. It ensures that your exposure is divided evenly to every financial asset, and you could be more dependable on any of them. Diversification is a financial practice designed to reduce the volatility of your portfolio over time.
Before we dive deeper into diversification, let us talk about the different types of risks you face when investing:
This is the risk associated with the overall performance of the financial markets. It includes factors like economic downturns, interest rate changes, and geopolitical events.
This refers to risks that are specific to a particular investment, such as the poor performance of a single stock due to company-specific issues.
As the cost of living increases over time, the value of your money decreases. Inflation erodes the purchasing power of your investments.
Some investments may not be easy to sell quickly without incurring significant losses. Liquidity risk is the danger of not being able to access your money when you need it.
Diversification in investing helps you minimize sudden losses. A diversified portfolio allows you to combat market fluctuations in a better way. Let us explore other benefits of portfolio diversification:
By spreading your investments across different types of assets, you can lower the impact of poor performance in one area. When some investments are down, others may be up, balancing out your overall returns.
Diversification can offer a more stable and predictable return over time, helping you avoid the extreme highs and lows associated with concentrated portfolios.
A diversified portfolio tends to have less price volatility, making it easier to withstand market fluctuations without panicking.
Diversification can help you balance risk and return, aligning your investments with your financial goalsa.
The main objective of an investment portfolio is to reduce sudden losses by increasing the range of investments. Portfolio diversification helps prevent financial damage. So, to understand how to diversify your portfolio, you must follow this 4-step guide.
A well-diversified investment portfolio should have multiple investment avenues. So, it is advised to include various investment types in your portfolio and rely on more than one type.
An ideally diversified portfolio should include:
Suppose you invest in one individual type of investment, say stocks. It is suggested that even if you are investing in stocks, do not invest in a single stock or few stocks of the same sector; instead, diversify your investment among stocks of different sectors. For example, invest a manageable amount just in Tech stocks, but rather try diversifying your portfolio into auto, energy, real estate, IT, etc.
We know that the main objective of the portfolio is to reduce by diversification, and thus, it is advised to invest in options with varied risks. For example, you must also have a Guaranteed Savings plan in your portfolio if you have invested in the Stock Market.
Diversification is essential in investing because it helps reduce the chances of incurring sudden and heavy losses. So, it is important to maintain the ratio of the amount invested between different investment options to stay balanced and grow according to your financial goal.
Imagine you have a basket of eggs. If you put all your eggs in one basket, and that basket falls, you risk losing all your eggs. But if you distribute those eggs into multiple baskets, even if one basket falls, you will not lose everything. This simple analogy applies perfectly to investments.
A diversified portfolio is like having multiple baskets for your investments. Instead of putting all your money into one asset or a single type of investment, you spread it across various asset classes such as stocks, bonds, real estate, and maybe even some cash. Here is an example of a diversified portfolio:
This portfolio is diversified because it includes different asset classes, such as stocks, bonds, and real estate. It also includes some cash, which can be used to cover unexpected expenses or to take advantage of investment opportunities. Doing this reduces the risk of losing a significant portion of your investment if one particular asset class underperforms.
While diversification is generally a smart strategy, there are some potential issues to be aware of:
It is possible to over-diversify your portfolio to the point where it becomes too complex to manage effectively. This can lead to high trading costs and limited benefits.
If all your investments are closely correlated, they may move in the same direction during market turbulence, negating the benefits of diversification.
While diversification can help protect your portfolio from significant losses, it can also potentially lower your returns. If one of your diversified assets performs exceptionally well, you will not benefit as much from that particular investment.
Portfolio diversification is a vital strategy for investors looking to achieve a balance between risk and return. While it may not guarantee the highest returns, it offers protection and stability in the face of market volatility. Remember that diversification should be tailored to your individual financial goals and risk tolerance. So, consider spreading your investments to build a more secure financial future.
Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.
Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors
In this policy, the investment risk in the investment portfolio is borne by the policyholder.
Kotak e-Invest
Features
Ref. No. KLI/22-23/E-BB/521
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The content has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Further customer is the advised to go through the sales brochure before conducting any sale. Above illustrations are only for understanding, it is not directly or indirectly related to the performance of any product or plans of Kotak Life.
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