How Can Diversification Impact Long-Term Investors?

Mobile-based and web-based trading applications are the true game-changers of recent times, as they have revolutionized the overall functioning and mechanics of the stock market worldwide. If we talk about India, these virtual trading platforms have encouraged more traders and investors from all walks of life.

Profit-generating resource, which was previously limited to a passionate group of traders and investors, has now become a pool of financially aware and goal-driven investors seeking to make the most of the latest technology for wealth creation. Even if someone chooses the best online trading app, one must be well acquainted with the nitty and gritty details of virtual trading before dipping toes in the volatile ocean.

First, there needs to be more clarity when it comes to differentiating trading from investing, of-course the seasoned players are well-versed in this aspect, but for the ones starting out. They must understand trading refers to the short-term acquisition and sale of financial assets such as stocks, bonds, and commodities. Traders tend to profit through short price movements using strategies like technical analysis, market timing, and chart patterns. However, investment is a long-term approach to generating profit over an extended period by investing in assets like ETFs, mutual funds, real estate, etc.

Understanding diversification:

Safeguarding an overall financial portfolio by investing in different asset classes is known as diversification, a classic example of not keeping all the eggs in the same basket. For example, gold is the perfect hedge for falling equity stock prices because every time equity falls, gold price increases rapidly. Hence, having a portfolio for gold investment will act like a financial cushion against the shocking downfall of equity prices.

Ways in which investors can diversify their portfolio:

  • Fixed income investment: before getting catfished by any trading platform providing zero brokerage, one should always check if they provide options to invest in debt instruments. Government-based companies issue bonds from time to time that offer fixed returns over some time; investing in these could help you avail risk-free and fixed-income securities.
  • Gold investment: this precious metal is the favorite form of long-term investment for many Indians as they are very safe and less volatile. They also act as collateral while applying for loans, and there are multiple ways to buy them, such as jewelry, pure-grade gold in the form of bars and biscuits, sovereign gold bonds, and gold ETFs.
  • Equity investment: Their rewards are amazing for those who have mastered the art of primarily two ways of equity investment, namely mutual funds and direct stocks investment. They are highly volatile and risky, so one should be careful with the strategies. However, for beginners, investing in index mutual funds is considered the safest investing method.

These were just a few preventive measures we could adapt to diversify our portfolio to its maximum potential. There may arise a question in your head, why cannot we invest only in the safest form of assets, such as government bonds? The answer is NO. We cannot because by doing that, we will decrease the ROI with a huge margin as all the growth-oriented assets will be excluded from our portfolio. So, next time you sign up for an investment platform offering zero brokerage demat accounts, check the availability of diverse asset classes.

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