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Diversification brings stability to portfolio

There has to be debt investments in a portfolio that provide some regular income

 
A INVESTOR must weigh the available investment options due to various reasons. A rise in the value of the investment means good tidings for the investors but it also raises the question of what is the next step forward. This is probably the time when alternative investment options should be considered actively as these can provide an element of diversification for the investor. In reality there is a need that the portfolio of every investor has a mix of the different options available as this will make the portfolio well rounded.
What is also significant is how investors can maintain some variation in their investments and here are some examples along with the benefit that they bring for the investor.
Regular income option: There has to be some debt investments as part of the portfolio so that there is some regular income that is constantly being generated for the individual. A distinction has to be made between a debt investment that accumulates earnings and one that generates regular income. There can be debt options that have no regular payout as the amount is accumulated and paid at the time of maturity.

Examples include Provident Fund, Public Provident Fund, National Savings Certificate, Deep Discount Bonds, Cumulative fixed deposits etc. An investment that generates a regular income pays this out so there is a cash flow that is received here.

A common situation that is witnessed is where there are a lot of debt or fixed income instruments in the portfolio but there is little amount that generates a cash flow. This can be a problem for several kinds of people including those who need some cash flow for running their household or those who are retired. There can also be another situation where most of the investment is locked up in assets like real estate and equities and the exposure in regular return options is very low which robs the investor of a good option to ensure that there is some regular return that is generated.


Golden option: There is also the option of gold that investors need to consider when they are constructing the portfolio. The exact proportion of the precious metal in the portfolio can differ depending upon the nature of the investment and also the size of the portfolio. The proportion of gold also has to be such that this does not go too high because once again it would mean concentration of risk and depending upon the nature of investment can also impact liquidity. There is a benefit if a small proportion of the portfolio has this kind of exposure as it would mean a hedge against inflation and also a diversification route. So anything up to 10-15 per cent of the portfolio is fine for most investors.

The nature of the end use of the gold is also important as over a period of time the precious metal requirement can be built up by making systematic purchases in the form that is required. Thus there could be a situation where a person is buying jewellery in different forms to meet the requirement of a marriage while another one is accumulating gold bars that can be put to the required use at a later date. There can also be an investment in a gold exchange traded fund (ETF) when the idea is to gain from a rise in gold prices but one has to be careful on this front as in case prices fall contrary to expectations then there can even be a loss of the capital involved.

Variations in equity: Most people think that there once there is an exposure to equities in the portfolio then this will complete a part of the overall requirement for an investor. This is not correct as there are various types of equities based on the risk element involved and its behaviour on the stock exchange and it makes sense for a person with a larger portfolio to ensure that they have a wide range of exposure to the equities. This will mean that the equity portfolio will have to be further subdivided into different segments.

This will include large cap and mid cap equity exposure which is the most common type of equity exposure along with areas like international equity or even micro cap equity through mutual funds or direct holdings. These will ensure that there is a differentiation in the mode of the holdings along with an exposure to the asset class as a whole.

Long-term view: There has to be a part of the portfolio that is present in long-term assets. These are those assets that cannot be accessed immediately but will be present for use at a later date. Again the nature of the asset could be varying and it could be a mix of debt and equity. The basic nature of the investment is such that once this is completed then there is no need to keep looking at it on a regular basis. The other thing is that is most likely that there will not be a regular payout that is received on the investment so the money is accumulating.

Cashing out: There also has to be some assets that should be set aside that can be put to use on an immediate basis to ensure that there is some cash that is available for effective use as and when this is required. These are amounts that are in addition to the emergency fund and they represent some assets that can be liquidated quickly and invested in another area for better returns or it could be those that can be used for undertaking some spending. It would be better for some investments in the portfolio that can be designated for such short term use.

 


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