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Diversification key for Financial Success – ArthaYantra

Covid-19 pandemic along with the biggest crisis has also brought financial awareness to the individuals. Looking at the current crisis everyone wants to secure their financial future, for which they are looking towards good financial planning and investment opportunities. In the process, most of them are getting attracted towards the investment promotions on various media channels and social media. But none of these media houses or social media gives proper guidance on what is a good investment plan for an individual. Every individual should go through a thorough and structured process of investment planning.

 

As in the case of any medical emergency we don’t pick any medicine of our choice, but we consult a doctor, depending upon the requirement the doctor recommends. Similarly one should pick the asset class depending on the financial goal and not depending on the friend’s or media suggestions. A medicine suitable for one might not be suitable for another, the same thing applies to investments as well.

 

Investment options are available for an Indian investor.

 

Stocks

 

Stocks / Shares / Equity all represent the same financial asset, the ownership interest in the company. Any individual investing in the company can claim part ownership in the company along with the periodical returns. There are two ways to invest. First at the time of initial public offer or IPO issued by the company or in the secondary market. One who wishes to invest in secondary markets can approach the exchanges NSE or BSE regulated by SEBI. Demat account is mandatory to invest in the Stock market.

 

Mutual funds

 

Mutual funds are turning out to be one of the popular investment options. It is an investment vehicle which pools small portions of money from investors with the common investment objective and invests the pooled money either into Stocks, company bonds (Debt instrument) or commodities. As picking the best-performing stocks or bonds is typically a difficult subject for most investors, these investors can take the help of a fund manager. The fund manager purchases stocks and bonds that are in line with the investment objective.

 

Gold

 

Gold is the most preferred Precious metal in India. Earlier it was only the physical gold (Coins, Biscuits or Jewelry ) was available for Investment but nowadays with the increase in technology Gold can also be Invested through electronic mode. Gold is also treated as an alternative investment, hence it has a negative correlation to stocks or mutual funds.

 
How can one Invest in Gold

  1. Physical gold (Coins, Biscuits or Jewelry )
  2. Gold ETFs (Exchange Traded Funds)
  3. Sovereign Gold Bonds issued by the Government from time to time.
  4. Gold Mutual funds
  5. Digital Gold/li>

 

International Investments

 

Investing in foreign stocks has become quite easy with globalization and liberalization of foreign remittances policies of the Reserve Bank of India. One can invest by opening an overseas account with an Indian brokerage firm. The US stock markets are the most versatile and liquid. Secondary option in case one does not want to open a trading account but invest into US stocks then one can choose the mutual fund or exchange traded funds which invest in foreign stocks. Several India-based mutual funds and ETFs invest either completely in US stocks or have a diversified international portfolio; you can simply purchase their units. If you are planning to diversify your portfolio, investing in US equities is one of the good options.

 

Real estate

 

One more option that is available for Indian Investors is real estate, most of the middle-class investors who are afraid of market volatility in stocks or mutual funds look towards real estate as a good investment for the long run, due to economic, geo political and demographic changes in India, Indian real estate in the recent past has given good returns as well. At the same time real estate investment also comes with the liquidity risk. In most of the times investor may not be able to sell the property on time or as per the desired value.

 

Alternate investments

 

Alternative Investment Fund is a privately pooled investment vehicle that collects money from sophisticated private investors. They differ from regular conventional investments like stocks and mutual funds, and due to this nature don’t come under the purview of Securities and Exchange Board of India SEBI mutual fund regulations. Minimum Investment would also be very high.

 

Some of the AIFs

  1. Venture capital
  2. Angel funds
  3. SME funds
  4. Infrastructure funds
  5. Private equity funds
  6. Real estate funds (REITs)
  7. Hedge Funds

 

Crypto Currency

 

Crypto currency is the latest asset class booming world over. Crypto currency is a digital currency in which transactions are verified and records maintained by a decentralized system using cryptography, rather than by a centralized authority. Crypto is an unregulated market and also due to its complex nature most individuals are not aware of it, hence we see a lot of price volatility. It is considered as one of the high risk assets. In India, as of today, we have very few options to buy and sell crypto.

 

Looking at so many options the big question is where to invest to get the best returns. But before getting into where to invest and how to invest one must be sure of how much to invest. As the old saying goes, don’t invest all your eggs into one basket. Make sure you have enough diversification of your portfolio. Investors can reduce the risk by diversification. Diversification reduces risk by allocating investments across various financial instruments. Unsystematic risk can be mitigated through diversification while systemic or market risk is generally unavoidable. To understand how much you can diversify and what % of investment one should invest in stocks or MF or any other available investment option speak to your Financial Planner. Financial Planners take you through a journey of structured process of financial planning and guide you in deciding the % of holding in each asset class.

Author: Ravi Kiran Kulkarni, Certified Financial Planner (CFP)

http://www.arthayantra.com

Ravi is a Certified Financial Planner (CFP) and a part of Investment Advisory Team. He is on e of senior Financial Planners with a great passion of financial planning. He is an avid writes and a speaker on the subject of personal finance.

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