Diversification first happens when you are selecting different types of assets to invest in. You may already have an investment in property, gold and some financial securities like fixed deposits and mutual funds.
Often diversification happens automatically without making conscious choices. However, when time comes to use investments for your financial needs, if you haven’t diversified with some calculated choices, you may find yourself in trouble. For example, what if property was your investment for retirement and now you find yourself at a juncture where you are to retire in a year with both property prices and demand on a downtrend?
Managing your investments for the most relevant outcome requires some thought to be given to asset allocation and diversification. Think about it in the following two simple ways and decide what suits you.
Keep your goals upfront
Keep your goals as a priority. For financial goals which are over 7 years away, you can add growth assets like equity. However, you have to switch to stable return assets like debt funds and deposits at least a year before your goal is to be achieved.
Keep in mind that, if you are investing in, real estate that it is not as liquid and flexible as equity investments. Which means that if you are caught in a bad market cycle, you may not be able to sell your real estate investments at the price or time you desire. Equity investments, on the other hand, are a lot more flexible and easier to exit.
For financial goals which are below five years but not immediate, you will look for stability of return. Consider short term debt funds, remaining invested for over three years will also bring about greater tax efficiency. You may opt for bank deposits too but here the tax impact is high leaving you with lower post-tax returns.
For your financial needs a few months to a year or two away, take the help of even shorter maturity debt and money market funds like Ultra Short Term and Liquid Funds. Some liquid funds even offer immediate redemption up to a limited amount.
Generally speaking, when you are young with the advantage of age on your side, you know that most of your earning years are ahead of you. Hence, its ideal to have your investment portfolio inclined to growth assets which can get volatile in the short term but beat inflation in the long run.
Following what you need for achieving your financial goal, will automatically result in relevant asset allocation choices and diversification.
Life stage allocation
Generally speaking, when you are young with the advantage of age on your side, you know that most of your earning years are ahead of you. Hence, its ideal to have your investment portfolio inclined to growth assets which can get volatile in the short term but beat inflation in the long run. Plus, the long investment horizon allows you to ignore near term ups and downs in the investment value.
As you come closer to retirement and there is a greater need to use the income from investments to replace your professional income, you can increase allocation to debt-oriented investments. This doesn’t mean you don’t hold any equity. Some equity allocation needs to remain to work on combating inflation post-retirement.
A balance in your investment journey is the key to achieving your financial objectives and that balance comes first from the right asset class diversification.