To reduce investment risks – especially in case of equities – portfolio diversification is a must. Diversification ensures that a portfolio continues to perform even if one or two companies fail.
Before starting their investment journey, young investors should keep in mind the need for diversification and invest accordingly.
“Investors, especially young professionals, are information savvy in this technology-driven age. Some of the popular topics that they pay attention to include risk profile, financial goals, short term and long term investment options,” said Nikhil Aggarwal, Founder & CEO at Grip.
“They also know the significance of starting early and how the time value of money needs to be taken into account,” he added.
Aggarwal describes how young investors may maximise returns by creating a diversified portfolio:
Diversification – a risk management strategy
One note that we would like to caution them about is the importance of diversification. It is a risk management strategy; the idea is to invest in many different avenues so that returns are maximised for the same amount of risk.
Some of the options that investors are keen on are stocks, mutual funds, FDs, and cryptocurrency, the reason being that they start with a smaller ticket size. While these are great, many of them are volatile.
The key to managing volatility is to invest in non-market linked returns. FDs are a good option, however, there are others available, namely leasing and inventory deals. These also can be started with a minimal investment amount, Rs 20,000 and above.
An investor in a leasing deal will co-own an asset leased to a company and receive fixed returns. Likewise, in an inventory deal, they’ll invest money in companies for the purpose of buying inventory and receive fixed returns.
Now if the investor is looking for a long-term investment option, they can choose startup equity or commercial real estate. Both these options provide non-market linked returns and the ticket size is just slightly higher than leasing or inventory deals.
With commercial real estate, the investor will co-own properties while with startup equity, they can purchase equity and share in the journey of an unlisted startup.
Investors can now take advantage of all these available options and maximise returns by creating a diversified portfolio with a mix of stocks, mutual funds, FDs, bonds and alternative investments such as easing and inventory deals, commercial real estate and startup equity.”