Proper financial planning is needed to achieve the goals – especially the long-term financial goals – within the specified time by taking minimum risks.
By Puneet Dang, Chartered Accountant, Co-Founder & Partner at SPRN Associates
Time and again we have seen the benefits of saving the hard earned money and investing it to achieve financial goals. Proper financial planning is needed to achieve the goals – especially the long-term financial goals – within the specified time by taking minimum risks.
Wise investing will not only help you guard your initial capital but to grow it to the levels it would not have attained otherwise. While an investment portfolio introduces some risk, it also offers an investor some control over his financial future.
Diversification is a technique of allocating investments into different assets classes like equity shares, bonds, mutual funds, cash instruments, commodities, precious metals and derivatives. It basically aims to maximise the returns by investing in different areas which will react differently to the same event. It is the most important component of achieving long term financial goals while minimising risk.
Considering the current scenario of Covid-19, stock of every other sector was adversely affected. If someone has invested only in the equity shares of the companies than they would have seen a sharp downside in their investment value. On the other hand, if they would have made a diversified investment portfolio it would not have been severely affected. The more uncorrelated your investment portfolio, the better it is.
Bond and Equity Markets generally move in opposite directions, so if your portfolio is diversified across both areas, hostile movements in one will be offset by positive results in another.
Nowadays, there are so many avenues available for the investors to park their funds. One can also invest in Commodities, Exchange Traded Funds, Real Estate Investment Trusts. This way, you will spread your risk around, which can lead to bigger rewards.
Diversification can help an investor manage risk and reduce the volatility of an asset’s price movements. Remember, that no matter how diversified your portfolio is, risk can never be eliminated completely.
Also, investors need to add to their investments on a regular basis. If you have enough money to invest, use the cost-averaging strategy. This strategy is used to smooth out the peaks and valleys created by market volatility. The idea behind this is to cut down your investment risk by investing the same amount of money over a period of time into a specified portfolio. In simple words, you should buy more when prices are low and fewer when prices are high.
At the end I can just conclude it with a very famous quote of Market Legend Warren Buffet that “Don’t put all your eggs in one basket”.