5 ways to diversify your portfolio

Few would dispute the importance of diversification while managing one’s investment portfolio. Simply put, diversification means spreading investments across various parameters, thereby mitigating the risk it is exposed to. If an adverse event were to occur, diversification would ensure that only a part of the portfolio is actually impacted; while the balance (due to its diverse nature) is immune to the event.

We present 5 ways by which investors can achieve a desirable degree of diversification in their portfolios.

1. Diversify across asset classesInvestors should ensure that their portfolios are diversified across asset classes like debt, equity, assured return schemes, gold etc. This would grant stability to the portfolio, by making it resistant to vagaries of the market. For example if you are an investor who has a flair for investing in market-linked instruments, the corpus invested in assured return instruments like fixed deposits could prove to be very useful at a time when the markets lose steam. Similarly investors whose appetite is best suited for assured return instruments can clock above-average growth from the portion invested in market-linked instruments.

2. Diversify across fund housesMutual fund investors should invest in offerings from various fund houses. Each fund house has a distinct management style, systems and processes in place, all of which are reflected in the schemes’ performances. Traditionally schemes from certain fund houses have been known to surface as top performers when markets are on the ascent; conversely there are others which perform the best in falling markets by reducing capital erosion. By investing in schemes across fund houses, investors stand to gain by being exposed to distinct management styles and processes.
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3. Diversify across fund managersInvesting disproportionately in schemes managed by the same fund manger can prove to be a risky proposition. This is especially true in the case of a fund house which is not strong on systems and processes i.e. the fund house is driven by its star fund mangers. In such a situation, the fund manager’s exit can spell doom for investors. Spread your risk by ensuring that your investments are being managed by different fund managers.

4. Diversify across variantsUtilise various segments within each mutual fund segment to achieve a well-diversified portfolio. For example if you are an investor in the diversified equity funds segment, look at investing (subject to your risk-appetite) in large cap funds, mid cap funds and even funds of the opportunities variety. Similarly within the hybrid funds (balanced funds, monthly income plans) segment, you could consider investing in various funds differentiated by their equity exposure.

5. Diversify across time horizonsIt would be a prudent move to invest in avenues across time horizons. Your portfolio could comprise of equity-linked instruments that compel you to have a minimum 3-Yr investment horizon. Similarly investments in liquid funds and short-term deposits can be used to service investors’ near-term liquidity requirements. Pension plans and long-tenured schemes like the Public Provident Fund (PPF) can be considered to build a corpus over a 15-Yr period or more.