How to Diversify Investment Portfolio in India?

February 21, 2024 SliceVista

You must be investing a lot of time and effort in building your investment portfolio, but are you doing it right? Believe it or not, crafting a stable investment portfolio is extremely challenging. Even seasoned investors make mistakes at times. There are risks involved at every step and a powerful strategy seems to be lacking. However, diversification of investment portfolios helps a lot to reduce risks. There are many benefits of a diversified portfolio, but beginners often face problems with it. Check out this piece on diversified investment portfolios, and get the right insight on how to build a resilient financial future.

What is Portfolio Diversification?

Portfolio diversification is more of strategic work than simply allocating your funds. Allocating/dividing your funds across industries, assets, and geographic regions helps you avoid getting in hot waters during a market crash. Plus, diversifying funds facilitates maximizing returns. Investment diversification can compensate for the losses in one fund with gains in the other. The objective is to maintain a stable portfolio.

What are the Benefits of a Diversified Portfolio?

Diversification of investment portfolios in India offers numerous advantages- thus seizing potential opportunities present in the Indian market.

1. Eliminate Sector-Specific Risks

India’s economy encompasses various sectors, each with its own growth trajectory and risk profile. But, not all of them operate at the same intensity. Diversifying across sectors tends to diminish the impact of sector-specific risk. This way it keeps your investment portfolio stable. According to data from the National Stock Exchange (NSE), sector-wise performance in India exhibits significant variations. For example, if the IT sector flourishes during certain periods ( even after significant volatility), FMCG (Fast Moving Consumer Goods) or healthcare might excel during different economic cycles. Diversification allows investors to capture growth opportunities while reducing exposure to the volatility of any single sector.

2. Leverage High-Growth Segments

India is a booming market with emerging trends coming up frequently. It means there’s scope for growth amidst high volatility. Growing sectors like technology, Electric mobility, e-commerce, healthcare, and infrastructure see massive growth. Quite obviously, they are becoming a segment of profit-making. India is all set for an investment growth of $350 billion in eCommerce by 2030, according to a Statista report. There will be increased internet penetration and accelerating consumer spending. Thus investment diversification across these booming sectors will fetch growth and enhance the possibilities of portfolio returns.

3. Protection Against Market Volatility

Various domestic and global factors contribute to the volatility of the Indian market. It includes economic policies, currency fluctuations, and geopolitical tensions. And, this pretty much explains why diversification of your funds in stocks, bonds, and commodities can help stay protected from market volatility. Diversification in different sectors prevents bankruptcy during turbulent times. So, a good way to keep your investment stable is to invest in different assets. It helps investors with the much-needed financial cushion during times when the other funds are making losses

4. Access to Diverse Investment Opportunities

In India, investors can build funds across equities, fixed-income, real estate, and alternative investments. Diversification promotes diverse investment ( as well as income) opportunities. This helps create their portfolio according to their risk tolerance. The Indian mutual fund industry has grown significantly in recent years, according to the Securities and Exchange Board of India (SEBI), with assets under management (AUM) hitting all-time highs. This has made it possible to access professionally managed portfolios that are spread over a variety of asset classes, including gold, bonds, stocks, and commodities.

5. Long-Term Wealth Accumulation

If your only agenda is wealth accumulation, fund diversification is the way. You can successfully avoid the risk of permanent capital loss if there is a downturn in one asset class. According to past trends, as examined by the Reserve Bank of India (RBI), thoughtful allocation of funds facilitates long-term wealth creation potential. Diversified portfolios maximize your returns while minimizing the market risks, compared to the concentrated accounts.

How is Diversification Relevant in the Current Economic Scenario?

Imagine the 2008 market crash where stocks suffered badly. If an investor only had invested in stocks, he would have been bankrupted by that time. But with diversification, an investor could still be optimistic about the good returns from bonds. Thus diversification keeps your investment profile stable even after the market crash while offering some cushion.

Precisely, diversification of an investment portfolio exposes you to high returns and at the same time provides investors peace of mind.

Options for Diversification of Funds in India

If you are a beginner and worried about how to diversify your investment portfolio, here’s a roadmap for you.

1. Equity

Equity refers to the investments in stocks that encompass sectors like IT, healthcare, Finance, and FMCG.

2. Debt

These are basically bonds that can be government bonds, corporate bonds, or fixed deposits for stability and income. Debt funds have slow growth curves, however, they are highly stable and survive the threats of market crashes most of the time. Returns from debt funds, despite being lower than equity funds, offer stability.

3. Mutual Funds

These are actively or passively managed index funds that are again allocated in different assets. Mutual funds are not as volatile as equity funds or stocks. A 2023 CRISIL report displays how the diversified MFs in India have outperformed all the concentrated portfolios over a couple of years.

4. Alternative Investments

While these are not usually equity, debt, or mutual funds, returns are pretty stable in this segment. Among the most popular alternative investment options, gold, real estate, or commodities are good ones as they are shielded from inflation most of the time. According to the World Gold Council, India is the world’s largest gold consumer, showcasing the potential of alternative investments for diversification. Also, investment in gold and real estate often sees profits due to their high growth curves.

5. Fractional Investment in Real Estate

Fractional investment in real estate in India is gaining traction as an innovative approach for individuals to participate in the property market without the burden of full ownership. This model allows investors to buy fractions or shares of high-value properties, thereby reducing the entry barrier and enabling diversification within the real estate sector. Through platforms or companies facilitating fractional ownership, investors can access a range of properties, including residential, commercial, and even industrial spaces, spreading their investment across different locations and types of assets. This approach not only provides opportunities for passive income and capital appreciation but also mitigates risks associated with property ownership, such as maintenance costs and market fluctuations. As India’s real estate market continues to evolve, fractional investment offers a flexible and accessible avenue for individuals to engage in property investment and wealth creation.

Tips for Diversifying Your Investment Portfolio

1. Evaluate your Risk Tolerance

Familiarity with your risk tolerance level helps you choose your funds more strategically. Accordingly, you can decide how much to invest in equity, debt, mutual funds or so to align with your risk tolerance level. According to the experts, risk tolerance level diminishes with age. People nearing retirement look more for investment stability.

2. Set Financial Goals

Define your investment goals. For some, it’s full-proof retirement planning, while for others it’s wealth creation or child education. Knowing this in advance helps evaluate your risk-taking capability.

3. Divide Assets Wisely

What percentage of your investment you want to allocate to each asset is a careful decision. Do your Math or get help from a professional for strategic allocation based on your goals as well as risk tolerance. A common approach is the 60/40 rule, where 60% goes to equities and 40% to debt ( since debt is a slow-growing fund).

4. Diversification Within Asset Classes

When we talk about diversifying your investment among stocks, bonds, and MFs, it does not mean one type of stock, bond, or mutual fund. Allocate your funds across different sectors, companies, and maturities within each asset class.

5. Consider Global Diversification

There’s no point in confining yourself to the Indian market only. If you are looking for fast and steady growth, explore international markets too. It widens your scope for diversification and potential exposure to different economic cycles.

6. Rebalance Regularly

This is extremely crucial. Periodic revamping of your asset class helps you reach your desired financial goals. It also keeps you aligned with your risk tolerance capabilities even when the market is going through turbulent times.

Final Thoughts on Portfolio Diversification

Aspect	Description
Portfolio Diversification	Strategic allocation of funds across industries, assets, and regions to mitigate risks and maximize returns.
Benefits	– Elimination of sector-specific risks – Leveraging high-growth segments – Protection against market volatility – Access to diverse investment opportunities – Long-term wealth accumulation
– Evaluate risk tolerance – Set clear financial goals – Divide assets wisely – Diversify within asset classes – Consider global diversification – Regularly rebalance the portfolio	Provides stability and cushion against losses, as evidenced in events like the 2008 market crash.
Options for Diversification (India)	– Equity: Stocks across various sectors – Debt: Bonds, fixed deposits for stability – Mutual Funds: Actively/passively managed funds diversified across assets – Alternative Investments: Gold, real estate, commodities
Tips for Diversification	– Evaluate risk tolerance – Set clear financial goals – Divide assets wisely – Diversify within asset classes – Consider global diversification – Regularly rebalance portfolio

Diversification is not an overnight affair, rather it’s an ongoing process that evolves with every economic cycle. To keep up with your risk tolerance and goals, your investment portfolio should be aligned and adapted. If you are a beginner, seek professional assistance to align your strategy, so that you do not end up with bigger risks.