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Diversification strategy

It is important to have a diversification strategy. 2020 has suffered hugely due to the pandemic of Covid-19. It has forced people to rethink their financial plans. Having a well-diversified portfolio reduces the losses during market volatility. The current health crisis has shown the benefits of having a balanced portfolio. Moreover, those who didn't have a balanced portfolio have suffered. So is this an end for them? No. They can still diversify and benefit from it. We discuss the benefits of diversification in this article. Let's begin!

What is Portfolio Diversification?

Portfolio diversification is a process whereby an investor thus invests their money in different asset classes viz. Equity, Debt, Real Estate, Gold etc. to minimize their losses. In case, one or more sectors don't perform well, the others would still give a decent return and the potentially huge losses would be limited.

How is it helpful in the current pandemic?

The ongoing Covid-19 has created a lot fears and doubts. Investors are unsure of how the markets would behave as the impact is still unknown on the economy and the recovery can take time. Diversifying one's portfolio wisely can limit the losses and generate good returns even during this volatile market period as there are many other sectors that are bound to witness massive growth once the economy picks up again. Hence, a good opportunity to make great returns.

Can I diversify my portfolio as well and how?

Yes!!! Indeed everyone can diversify their investment portfolio. You should immediately contact your Wealth Manager or AMC, in case you are already having one. In case, you don't have one, you can plan your investment wisely and gain from the market momentum which is slated to come soon. Investify Wealth Advisors Pvt Ltd offers an exciting range of financial solutions and can help you join the league of smart and successful investors. Call us on +91 9315530833 , WhatsApp on ttps://wa.me/message/AFQEWOI4T3D3E1 , Mail us at [email protected] and experience financial wellness.

Diversification strategy in 2021

For those of you, whoever had any doubts regarding the diversification of their investment portfolio, they have all been settled in this pandemic. Moreover, there is market volatility due to the pandemic. Also, stock prices are fluctuating due to the Covid-19 situation, and various governments have announced packages.

As we know more about the pandemic's impact on the world economy, one thing is subsequently certain. Businesses will be facing a hard time.

Prior to talking about diversification strategy, we will discuss the differences between diversification and hedging. Because in crisis situations like the pandemic, while it is helpful to diversify it is harmful to hedge. To get a better understanding, we analyze correlation.

 

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What is Correlation in Diversification strategy?

Correlation means how two different variables are related. Subsequently, in investing correlation means how two securities are either moving in the same or opposite direction at the same time. Moreover, it is applied in advanced portfolio management and ranges between -1 and +1. It is an important part of the diversification strategy.

Example 1: Inflation vs Rent Example 2: Interest rates vs Bond yield
When inflation increases, general prices across the board increase as well. Rent of property increases too. Thus, this is a positive correlation. When inflation increases, the interest rates increase, and consequently bond yield decrease. Thus, this is a negative correlation.

 

Diversification Strategy

Ignore Lum-sum Investing

Ignore investing a big amount at once: As we are clear about diversification, it is important to not invest a lump sum amount at once. It is easy to fall for low market prices and invest a lump sum amount. To think that the market has reached its bottom point will be a mistake.

The markets are unpredictable in such a crisis. Timing the markets is a big gamble if the markets further go down, you might suffer big losses.

Consider Systematic Investment Plans

Systematic Investment Plans are a good way to invest: SIP’s are particularly helpful during market volatility. Subsequently, you have to invest a fixed amount at regular intervals and the market conditions do not matter. Consequently, the investor benefits from the Rupee Cost Averaging as the average purchase cost reduces and decent gains are made.

Long-term Investing

Long-term equity investment: Thus, you now know that you should invest in securities with minimum correlation, not investing a lump sum amount, and think about SIP’s. The next issue to consider for investors is their investment duration during volatility.

Short-term investors suffer the most from a volatile market. If past performance were to be looked at, they will thus explain that markets are always volatile but they subsequently recover from the crashes and correction.

Though past performance is not a guarantee of what the future holds, the economy consequently returns to normal in the due course of time. A long-term investment is something you should strongly consider.

Sub-Diversification

In the investment world, it is known as diversifying a diversified portfolio. Let’s assume that you invest 50% of your portfolio in equities, 20% in debt, 20% in stocks, and 10% in deposits( just an example and NOT A RECOMMENDATION). Moreover, this is the first level of diversification and depending on your portfolio, you can thus choose the following options.

1. Diversifying equity funds across sectors

Due to the pandemic, most sectors of the economy are thus hit. If you feel inclined to invest, you should look for those sectors which have the capacity to turn around once the economy recovers. Banking, insurance, healthcare, etc. are some of the places which can be looked into.

2. Diversifying debt investments

Generally, most investors prefer equity to diversify. Debt classes can be a good option as well. Even under debt classes, they either invest in debt funds(considered secure) or invest directly in some debt instrument without checking the correlation. Under the current situation, you should diversify within the debt class too.

Income funds, fixed maturity plans, dynamic bond funds, etc. are some of the many other debt funds that can thus help you in diversifying your debt portfolio.

3. Invest in different market caps

It is always wise to invest in a company with strong fundamentals during crisis times. But in case your portfolio is already invested in large-cap and blue-chip companies, you can invest in small-cap companies through such funds. This will help you diversify across different market caps.

Conclusion

The current pandemic has created a lot of fears. We understand your emotions and it is not easy to move ahead in such times. But we strongly discourage you from redeeming your investments. Moreover, you should invest in a calculated manner. You should remember that panicking will cause you further losses.

If you feel that the volatility of the markets would continue and the recovery can be in a sooner time, you can book your loss. Subsequently, you can go for a better portfolio suited to the current situation. Finally, the three rules of a successful investor are risk tolerance, not losing focus of their financial goals, and investment duration.

Be it reclaiming your invested money back or entering the market when it is at the bottom, follow the three rules. Happy investing!

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