Why should you diversify your share portfolio?

Dictionary meaning of diversification is – having variety of character or form or components; or having increased variety

It is a familiar term for many investors. In a nut shell “Do not put all eggs in one basket”. An investor diversifies his portfolio as a vital part of financial planning and also to maximize return on capital. One can diversify his investments into different shares or different asset classes like real estate, bonds, gold, bank deposits etc. When one asset class fails to give proper returns it is balanced by another asset class. For example, when stocks are moving down gold moves up and vice versa.

diversify investment portfolio

We will see the advantage of diversification and how we can profit by diversifying our capital and minimizing (containing) our risk.

  1. Economic crises – Portfolio diversification can prevent you against the risk of economic crises (mostly during external aggression or war). When financial market crashes (Lehman Brothers) suddenly assets like gold are seen as safe heaven to park your investments. And when the bull market is on run assets like stocks give a good return on your investments as compared to gold. So if you have diversified into gold and shares your loss in one asset class is covered up by another asset class. Diversification can be used as a safety net.
  2. Tax advantage – It is a great way to save taxes on profit earned. Investment in stock for more than one year is not taxed. Similarly, there are tax saving mutual funds (3 years lock-in period). Also, deposits in PPF (deposit, accrued interest, and withdrawal, 15 year period) are also tax-free to the certain extent. So diversifying your portfolio into stocks, mutual fund, and PPF (and many other) you can save on tax from your investments.
  3. Sectorial advantage – When the government announced schemes/policy like home for all, affordable housing, decrease in housing loan interest rates, etc construction sector will get the boost. As part of a diversified portfolio if you have shares of companies dealing in construction and allied field you will get good returns on investments. Trump’s announcement gave the boost to American IT sector companies and demoralized Indian IT sector. How to make money in Indian stock market and in which sectors to invest in so as to diversify your risk to the minimum.

You can diversify your share portfolio across various sectors like banks, cement, automobiles, pharma, telecom, energy, IT, FMCG, consumer goods, metals, media, and entertainment etc, and also across large, mid. small micro and mini caps, that is market capitalization. See Indian stock market overview for more sectorial details.

  1. Overexposure – One should not be overexposed to one sector or asset class. Say you keep on regularly buying shares of one company says ABC which is in pharmaceutical sector deriving most of its revenue from the USA. Now USA changes its policy and ABC cannot sell to the USA and suffers the huge loss. Since you have been accumulating shares of ABC for a long time your return on investment wipes out. There are many myths about Indian stock market which should be dispelled among the general public. Across asset class, those who have invested their lifelong income only into reality, because of demonetization, RERA, other policy have suffered a huge loss on their returns. Had the investor diversified into shares, gold, bank deposits etc. he would have lessened the loss on return. One should know when to sell shares to make profit.

Purpose of diversification is to minimize risk and provide meaningful gain, so as the financial goals are achieved and can have a comfortable retirement and a life one dreams of.

Top Ten Rules of Investing In Indian Share Market

Indian share market is well-known for the instability. Basically, Indian share market is recognized as the safest place for the investment but these days it has become the most challenging market. Indian share market deals with a range of shares that are available for trading point of view. There are a number of rules about investment in the stock market but I summarized important top ten rules of investing in Indian share market.

Rules of Investing

1. Need a plan

Having a plan is essential before you put any money to work; you need to know what you are investing. You cannot be successful in share market if you do not have a well-researched plan. An effective trading plan or share market tips can help you to be updated with the market change. Investment according to plan is the key to getting high returns on it.

2. Always keep learning

You cannot gain knowledge of trading in a day, few weeks or even in months. Successful traders analysis all the latest research on technological analysis then they find their hands on. They also read numerous books to know trading techniques and about trading psychology. They follow other successful traders to know how they deal with their accounts.

3. Create a big portfolio

There is no doubt; rank of diversification depends on every investor’s risk taking ability. This is the reason; diversification of the portfolio is the key aspect of earning the best return on investments across asset and tool with the least risk.

4. Try to capture the huge market move

Beginner traders frequently book profits too fast because they want to get pleasure from the engaging feeling. A trading account is not increasing that is not sustainable. Therefore, when you consider you have entered into a big move, you have to ride it out until the market stops performing right.

5. Need to avoid overtrading

Overtrading is the prime mistake that most new traders do. A good trader always prepares to trade light as the market turns changing and even not trade if there are no trades to make the profit.

6. Implement disciplined investment approach

Disciplined investment approach in the stock market would help you to come out from stock market fluctuations. Many stock market tips provider follow disciplined investment approach.

7. Have practical expectations

There is nothing wrong with hoping the most profit from your investments although you can face difficulty if your economic goals are based on only idealistic assumptions. Therefore you should have practical expectation from your investment.

8. Take knowledgeable decision

Proper study always should be started before investment in the stock market. Normally, investors go through the name of a company or the group they belong to. So, you need to take the right decision.

9. Search for appropriate online trading broker

There are many online trading brokerage firms for the active and prospective traders. You should choose the proper brokerage firm according to the trading requirements and investment plans.

10. Find the trading software

If you register in the online brokerage firm through paying an amount of money then you will get the access information of trading software for the knowledge. This software assists you in the purchase, sell and track your trades. Ensure to choose a firm that generally helps you understanding the software.

Basic DO’s and DON’Ts of investing that you should follow

Investment is a way of investing money to earn more profit. Basically, it is the initial step towards the potential security of your funds. Investment is an important thing from several points of views because it is one of the best ways to get high ROI. There are different factors that affect your investment and its revenue. There are numerous ways of the savings by which you can save your future. In addition, there are many things those investors should remember means what to do and what don’t do.

investing

DO’s of investing that you should follow

  • It is important for investors to check the company’s credentials, management, fundamentals, the latest announcements and different other disclosure before placing an order by the market intermediaries. It is one of the investing rules. In addition, there are many sources of information like exchanges websites & companies, data vendor databases, business magazines and many more to gather information about the interested company.
  • Investors need to give clear and definite directives to the broker, agent and the depository participant.
  • Investors always should deal with the market mediators that are registered with SEBI and the stock exchanges.
  • You must give special attention to information related with the mediator before register as a client with any mediator. Need to read the contents carefully that stated in the risk disclosure document and is the necessity for investor registration process to deal with the brokers.
  • Investors always keep copies of papers and other important documents that they want to send to companies, trading member, registrar and other.
  • You should follow up carefully and rapidly when you do not get the necessary documentation in given time, get in touch with the concerned person like trading member, company etc.
  • Investors have to implement trading & investment plan according to their risk bearing ability because all investments have some risk that differs according to the investment plan used.

DON’Ts of investing that you should follow

  • It is necessary for investors to don’t execute any document through any mediator without understanding the terms & conditions.
  • Investors don’t get mislead through companies showing approvals & registrations from the government organization as the approvals could be for other purposes and not for securities you are buying.
  • Investors should not believe on the financial performance of the companies publish or featured in newspapers or electronic media.
  • It is vital to don’t blindly follow media information on company progress because some of these could be fake or misleading.
  • You should not get misled by guarantees of refund of your investments by post-dated cheques.
  • Investors should not deal with unregistered brokers, sub-brokers and other unregistered mediators for the investment.
  • You should not forget the risk that involves the investment.

These are very useful points that investors should remember when they invest. Investment can be started from everywhere with a new plan or with a developed plan to achieve set goals for more profit. The most beneficial way is to have a carefully developed plan. It begins with setting economic goals and then increasing and following an asset program that is reliable with those objectives.