Is it better to invest in a single scheme or diversify portfolio?  | Motilal Oswal

Invest in a single scheme or diversify portfolio

Diversification is one of the fundamental elements of financial planning, and as a result, many investment experts recommend it. It aids in the reduction of risk in one's portfolio, making it more robust. However, you must diversify in a wise way in order to protect yourself against market volatility.

Many investors, based on our experience, continue to purchase different equities, mutual funds, and debt instruments on an ad hoc basis, believing that they are diversifying their portfolio. However, we believe that unless you execute it correctly, it is pointless and will not add value to your total portfolio.

  • Diversify your portfolio across asset types

Yes, diversifying your portfolio across asset classes is critical, since not all assets move in the same manner. While you may have a high risk appetite and should invest in stocks, you should also have exposure to other asset classes including debt, gold, and real estate. This aids in lowering your portfolio's total risk of value loss. So, if the Indian stock markets become volatile, investing your hard-earned money in debt instruments like fixed deposits and fixed maturity plans might be beneficial.

However, despite diversifying across asset classes, invest your assets wisely. Consider your age, income, costs, and proximity to your objectives, all of which may help you develop a sensibly diversified portfolio across asset classes. You may also use a diversification strategy depending on your risk profile. As an example, if your risk tolerance is high (aggressive), you may tilt your portfolio toward the equities asset class. Similarly, if you are a conservative risk taker, your portfolio should be tilted towards fixed income instruments, whereas if you are a moderate risk taker, your portfolio should be split 60:40 between equities and debt.

  • Diversify your investing portfolio

There is also a need to diversify within each asset class across numerous investing channels. As an example, if your risk profile permits you to invest mostly in equities, you should diversify your portfolio properly between stocks and mutual fund schemes. Furthermore, proper diversification is required inside equities and mutual fund schemes, which may assist you decrease risk while also increasing wealth. As a result, you must be careful not to over-diversify your portfolio or to make it excessively concentrated by owning too many or too few companies and mutual fund schemes in equities.

Similarly, diversification across different debt instruments such as bank FDs, corporate FDs, debt mutual funds, and modest savings schemes should be taken into account while constructing the debt composition of the portfolio.

  • Diversify your portfolio across time horizons

You should have many investment portfolios, each catering to a different demand and with a different time horizon. As an investor, you could have short-term objectives, medium-term goals, and long-term ambitions. Each of these goals should be supported by a separate portfolio, with assets that correspond to the time horizons. Because they are best positioned to perform over longer time periods, equities may account for a bigger percentage of a long-term portfolio's composition. Debt instruments, on the other hand, may come to dominate short-term portfolios.

  • Diversify your securities portfolio among different issuers

Many of us often come across individuals who have invested only in the securities of a few issuers, either because they believe they are secure or simply because they like the issuer. It's crucial to remember that investing is a serious business, so put your emotions away and invest logically. If you don't diversify among different issuers of securities when you develop a portfolio, you risk aggravating the danger of concentration. You should invest across Asset Management Companies in mutual funds schemes, not only because it comes from a large or well-known fund company. It's worth noting that each AMC has its own investing style and approach, which may help with portfolio diversity. Furthermore, rather than relying on the advice of friends, family, and coworkers, it is critical to carefully choose winning mutual funds for your portfolio.

Similarly, while investing in debt products, diversification between issuers is recommended. For instance, if you want to invest your hard-earned money in FDs, you should seek out issuers such as banks and corporations.

  • Diversify your portfolio across nations

Today, with resident Indians being allowed to invest in assets and securities outside of India, subject to Reserve Bank of India restrictions, your diversification options have grown even more, as you may now diversify across nations. However, while diversifying your portfolio, you should be aware of the global economic situation - and, more particularly, the nation to which you want to gain exposure. Also, you must be well-versed in the tax implications, since wealth building will be limited until sufficient tax-adjusted returns are generated, even if you do have a unique diversification advantage.

Wrapping Up

Any endeavor to diversify will be for nothing if it is not accompanied by careful portfolio rebalancing. Rebalancing is difficult, and many people fail to rebalance their portfolio properly. It entails portfolio realignment, and few people are aware of what constitutes good realignment. As a result, it's important to remember that diversification and rebalancing are both essential components of investment management.

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