After going through the first 4 steps, nest one is Diversify across various Asset Classes.
We all know that never ever put your all eggs into one basket. So if you have Rs. 100 to invest in, diversify it in different asset classes based on your risk profiling, investment time horizon & future financial goals. Each & every asset class has their own nature, property and one should know all pros & cons before investing.
Some of the risk associated with various asset classes are:
Inflation Risk - Cash & Debt
Liquidity Risk - Insurance & Real Estate
Principal Risk & Volatility Risk - Equity
High Tax at maturity - Debt
Currency Market Risk - Gold
Encroachment Risk - Real Estate
One can create asset allocation by choosing from equity, debt, gold, cash, real estate & insurance. Your portfolio needs to be properly diversified as asset allocation reduces the downward risk of the portfolio to the great extent. Since all asset classes behave differently during different market conditions, they act
as a hedge against each other and help in creating a good margin of safety.
However, remember if you are boarded with 100% equity exposure, then you are carrying high principal risk in the short term. And if you prefer to go with a 100% secured debt instrument, then you carry high inflation risk in the long term.
A Mutual fund is the only platform in India that cater to the need of
saving + investing both.
Diversification plays a key role in wealth creation
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