7 best ways to maximise profit using a diversified portfolio

Highlights

• The importance of a well-diversified investment portfolio should never be undervalued in any market condition.

• Experts advise not to put all your eggs (investments) in one basket and follow diversification.

• Diversification ensures that a variety of investments in a single portfolio yields a higher return.

The importance of a well-diversified investment portfolio should never be undervalued in any market condition. While the bulls are driving the market, investors are assured of high returns. But the situation changes when bears weigh on the market sentiment.

It is the time when investors realise the importance of portfolio diversification. In short, one must never put all his eggs (investments) in one basket. It is the central line of argument on which the theory of diversification works.  Diversification ensures that a variety of investments in a single portfolio yields a higher return.

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Here are the seven best ways to create a profitable diversified portfolio: 

Assessment of financial goals 

The foremost is to carry out an assessment of your financial goals before you go ahead to build up the investment portfolio. It is important since diversification should always be done with clear financial goals in mind, including income needs and risk appetite.

You should have an idea about your in-hand capital and the time required to grow investments. The other thing that all investors must know is that higher risks follow higher returns. A much younger person would have a higher risk appetite compared to a retiree and would devote a larger portion of his portfolio to equities than debt.

Appropriate asset classes

Investors can employ a range of strategies to divide an investment portfolio into appropriate asset classes.  They should consider factors such as stock type, market cap and sector while selecting equities for the equity portion of the portfolio.

While picking up debt, investors should consider coupon rate, maturity, bond type, and credit rating. When selecting mutual funds, investors should always study the fee charged by fund managers.

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Go for fixed-income solutions 

Fixed-income investments help to further hedge portfolios against market volatility. These funds mimic the performance of broad indices. Instead of investing in a particular sector, they reflect the debt market’s value. In addition, these funds charge low fees.

Dollar-cost averaging 

It is important to keep adding to your investments regularly to maximise your profits. You may use dollar-cost averaging strategy to cut down your investment risk by investing the same amount of money over a regular period into a specified portfolio of securities. By employing this strategy, you may buy more shares when prices are low and vice versa.

Rebalancing portfolio 

Experts advise to carry out rebalancing of investment portfolios on a regular basis. It includes analysis of investments since changes in prices may have an impact on initial weightings. The other things to investigate include risk appetite, future requirements, and financial situations. It would help to find out which positions are overweight and which are underweight.

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Tax implications 

It is also advised to look after the tax implications of selling assets while rebalancing and readjusting the portfolios. There may be a case where an investor might have gained significantly in the recent past, but if he were to sell all his equity positions to rebalance his portfolio, he might incur significant capital gains taxes. 

When to get out? 

Investors should always remain updated with what is happening in the market. It would help them in judging the right time to make an exit from an investment or sell and move on to the next investment. Even as timing the market is never easy, still, one should have some idea about what is going around him. 

The Bottom Line 

Investing can be a profitable activity provided investors adopt a disciplined approach and use portfolio diversification in the best possible way. It would help them in making a profit even in the worst of times.

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