Why is Portfolio Diversification Important?

Budgeting & Saving


Sep 4, 2020

As women, we tend to make investment decisions that are safe. We choose a steady growth that is a lot better than drastic ups and downs. In fact, women are risk-averse as we looked at data in our previous article. But does that mean that we unnecessarily condition ourselves towards instruments that are ‘safe’ but don’t give the return on investment that we need?

What is Diversification?

Diversification, simply put, is the practice of spreading your investments into different instruments so that they are exposed to varying amounts of risk. This practice is designed to help you reduce the volatility in your portfolio.

One of the most important factors to look into here is how to balance your comfort level with risk and the time you have for your investments to be parked.

So where do I begin?

Start early. Start investing for your retirement at a young age. This helps you take aggressive decisions in the beginning, that allow the investment growth rate to keep pace with inflation. On the other hand, if you invest too aggressively when you're older, chances are that you lose all your savings with not enough time to earn them back.

The best way to build a good investment portfolio is to diversify your assets/ investments. This strategy has worked through the years and is one of the main reasons behind successful decisions. But remember, diversification does not ensure a profit or guarantee against a loss. It simply means that your chances of ensuring a profit are higher than your chances of incurring losses.

How do I build a diversified portfolio?

To simply break it down, there are 3 primary components to a diversified portfolio.

Stocks: Stocks represent the most aggressive portion of your portfolio. They provide you with the opportunity for higher growth over the long term. However, this potential for growth comes with greater risk, especially if it is in the short term. Since they are so volatile, you should keep only a small portion of your portfolio under this bucket.

Bonds: Most bonds generate regular interest income and are on the whole considered to be less volatile than stocks. They can also cushion you against unpredictable ups and downs of the stock market since they are very different from the way stocks behave. One good way to start is by buying government bonds which are not just safe but pay-out interest as well.

Long Term Investments: There could be other long term investment options that could help create a well balanced and diversified portfolio. For instance, real estate, some part investment in gold. If you are salaried chances are you already have an EPF account that provides long term growth in a safe asset.

It is important to create a portfolio that future proofs your finances.

Bottom Line

It can get very confusing to get out of one’s comfort zone when it comes to investing. While many of us have all been used to traditional investments such as Fixed Deposits, the new interest rates and the rising inflation costs are not enough to keep us above water.

In order to make your future secure, you need to make smart decisions. One smart decision you can make is by downloading Basis and checking out your tentative retirement corpus amount. This will allow you to start planning your expenses, investments and life backwards thus giving you the power to truly take charge of your money!

Download the Basis app now!

Basis is a first-of-its-kind platform, aimed at enabling women to achieve financial independence through expert advice, in-app knowledge Boosters and supportive communities.

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