How to diversify your portfolio considering the current market conditions?

How to diversify your portfolio considering the current market conditions?


In the world of investing, everyone enters to earn high returns. However, high returns come with high risk. There are risks and rewards associated with every investment category.

When choosing an asset class, investors have to decide whether a single or mixed asset class is the right one to meet their needs.

“Depending on the financial goals and objectives of the investor, investing in different asset classes is the ideal option,” says Arun Kumar, Head of Research, FundsIndia.

Here are some simple rules for building a diversified investment portfolio;

  1. Avoid equity if your time frame is less than 3 years – 100% debt fund allocation.
  2. Equity up to 30 per cent if your time frame is between 3-5 years.
  3. 30-70 per cent in equity if your time frame is more than 5 years.
  4. Gold can be kept at 10-15 per cent of the total portfolio.
  5. For your equity portfolio, equally diversify across 5 different investment styles – Quality, Value/Contrast, Growth at Fair Price, Mid & Small Cap, and Global Equity creating a well-diversified portfolio with less portfolio overlap For.
  6. Choose good equity funds with a long-term consistent performance track record and an experienced fund management team.
  7. Given that most look at debt funds as an alternative to fixed deposits, most of your debt exposure is short term (less than 3 years to reduce interest rate risk) and high credit quality (>90 percent AAA and equivalent exposure). ) should be in the fund. To avoid credit risk). Even if you want to take on interest rate risk or credit risk to improve returns, it is better to limit these risks to less than 30 percent of your total credit risk.
  8. Rebalance the asset allocation mix every year if it deviates by more than +/- 5 percent.

Kumar explains, “In the above context, an appropriate allocation to equities can be decided on the basis of its ability to tolerate intermittent downtrends.”

He further added, “A temporary drop of 10-20 per cent once a year should be considered normal behavior from equities. As history goes, a temporary drop of 30-60 per cent once in 7-10 years should be part of the expectation.

Based on the above expectations and how much near-term downside you are willing to tolerate, you can roughly decide on your equity allocation. Additionally, once you get this asset mix right, this single decision will largely determine 80-90 percent of your investment outcome.


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