To minimise financial risks, it's advised not to invest all the money in a single instrument, but diversify the investment money by including different instruments in the portfolio.
To minimise the risk of all the eggs getting rotten, it’s said – “Don’t put all the eggs in the same basket.” Similarly, to minimise financial risks, it’s advised not to invest all the money in a single instrument, but diversify the investment money by including different instruments in the portfolio. This is because, in case an instrument fails to perform, other performing instruments would negate the loss and provide some positive returns.
Diversification is absolutely necessary in case of investments in individual stocks, as there is a risk of losing the capital invested.
Apart from managing capital risk, diversification is also useful in minimising interest rate risk, default risk, risks arising due to economic downturn and to optimising returns.
Apart from having debt and equity in a portfolio, diversification may also be done by other asset classes like gold, real estate etc.
Gold is considered as a hedge against the economic and market downturn, as investors take refuge in gold when other asset classes struggle.
So, the presence of gold provides stability in portfolios by balancing the return during the entire economic cycle.
However, keeping physical gold at home may result in risks of theft, burglary etc and an investor would need to spend money for hiring locker and purchasing insurance to protect the gold.
So, it’s better to add paper gold or digital gold – like Sovereign Gold Bond (SGB), Gold ETF etc in the portfolios, instead of physical gold.
“Gold may comprise 5 per cent to 10 per cent of the overall portfolio. It is because gold has a low correlation with other traditional asset classes. SGB is issued by the Government of India and turns out to be a safe method for participating in gold given that it offers an additional 2.5 per cent return. It further allows investors to enjoy bullion returns without storage requirement and in a hassle-free and paperless manner,” said Nitin Rao, CEO, InCred Wealth.
Another asset class that may add stability in portfolios and ensure regular return is real estate.
However, purchasing a property not only requires huge investment, but also needs substantial maintenance cost.
Moreover, real estate properties are not liquid assets, so may need lots of time to find a suitable buyer at the time of selling the property.
So, just for investment purposes, more feasible and easier ways to invest in real estate are through Real Estate Investment Trust (REIT) or through fractional investment that require smaller investments and professional management of the properties.
“REIT is another investment format that empowers investors to tap real-estate-based products with the confluence of capital appreciation and steady returns. It extends capital growth via quality real estate allocations without having to get involved in managing a physical real-estate project. In this domain, making predictions is relatively easier as everything from asset to cash flows is defined with fewer dynamics involved than gold,” said Rao.