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How portfolio diversification ensures that you reach all your money goals

Portfolio diversification is achieved by investing across fund management styles, geographies and asset classes

May 01, 2021 / 11:03 PM IST

A portfolio that is well-constructed not only ensures participation during market rallies, but also helps in downside protection. A key step to building such a portfolio is to diversify across asset classes. It doesn’t just mean holding on to too many schemes. Here’s how you must go about diversifying your investments meaningfully.

Spread across asset classes

Even if you like taking risks, you need a bit of debt investments in your portfolio. On the other hand, even if you are conservative, you need a bit of equity. Why?

That’s the crux of asset allocation. Different asset classes do not rise and fall at the same time. For example, in FY2020, large-cap equity funds fell in value by 23.92 percent, while international schemes declined just 6.96 percent. However, in the same year, gold appreciated 37.34 percent. But the tide turned in the subsequent year. While large-cap equity schemes and international funds gained 72.84 percent and 54.59 percent, respectively; gold managed to deliver only 0.2 percent return.

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Asset allocation is made easier via multi-asset funds.

Real Estate Investment Trusts (REITs) can be considered, to avoid the hassle of buying and maintaining physical real estate. At the moment, however, options are very few.

Diversify within an asset class

Over the past one year, small-cap funds gave 93 percent returns. Mid-cap funds delivered 73 percent returns. Large-cap schemes managed 56 percent return. Should you now invest everything in small-cap funds?

That’s a resounding no. The fortunes of small-cap funds head south as swiftly are they head upwards. But you shouldn’t avoid them altogether. Diversify across large, mid and small-cap funds and look at various strategies.  For example, if you remain keen on value investing, but want to stay off small-cap stocks, you may want to look at exchange traded funds tracking the Nifty 50 Value 20 index.

Diversify across geographies

Many Indian investors have deployed money in foreign funds over the past two years. And rightly so.

In the COVID-19 pandemic, we have seen various nations going through various phases of recovery. Last year, the Indian economy was recovering fast, while Europe and US were battling with the COVID-19 surge. Now, the Indian economy faces lockdowns and the US is doing better. Diversifying overseas helps us to invest in businesses that are not available in India. Some developed markets share low correlation with Indian stocks.

“Businesses that enabled remote working took a leap over the last one-and-a-half years as a result of the pandemic. We should not only be a consumer of these, but also invest in them,” says Vinayak Savanur, Founder and CIO at Sukhanidhi Investment Advisors.

Diversifying in fixed income

Events of the past two years have shown that it is not easy to pick a debt fund. Liquid and ultra short duration funds are meant to park money for the short term. If you wish to start a systematic transfer plan (STP) into an equity fund, these are the ideal schemes to help you do so.

Short duration funds and corporate bond funds are ideal, if you wish to stay invested for at least three years. Gains earned on sale of units held for more than three years are treated as long term in nature. They are taxed at 20 percent after indexation.

“Invest in credit risk funds if you can take that extra risk and the portfolio’s yield net of expenses is at least 200 to 250 basis points more than the interest offered by the fixed deposit of a nationalized bank,” says Parul Maheshwari, a Mumbai-based Certified Financial Planner.

While investing in long-term gilt funds, match your time frame with that of the duration of the underlying portfolio. If you are taxed at lower slabs, then you may also consider options such as postal time deposits and National Saving Certificates, if you can hold them till maturity.

Reviewing and subsequently rebalancing your assets is a must. They help you achieve your financial goals.
Nikhil Walavalkar
first published: Apr 30, 2021 10:12 am

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