Reasons Why You Should Consider Diversifying Your Investment Portfolio
When you’re stepping in the sea of investment, it’s always a benefit to know how to swim, meaning acquiring knowledge about it. And if you’re seeking an expert’s help, they would tell you diversification in investment is the smartest decision for you.
In many people’s minds, investing is simply allocating capital and tracking their stock market investments. On the investment journey, there are many other crucial steps that should be taken and portfolio diversification is one of them.
In simple terms, portfolio diversification means spreading your investments across different assets and asset classes. In spite of your desire for all your positions to soar, some of them will lose money at some point. When that occurs, you need other investments to offset the decline.
Investing in diversification ensures that your capital will not be exposed to unwanted risks by avoiding “putting all your eggs in one basket.” In order to keep your investment assets from being too heavily weighted toward one company or sector, you should diversify your stock portfolio.
Let’s say you only own airline stocks in your portfolio. In the event of any bad news, such as an indefinite pilot strike that ultimately results in flight cancellations, share prices will fall. As a result, the value of your portfolio will drop significantly. A few railway stocks can counterbalance these stocks, reducing the impact on your entire portfolio. It is very likely that railroad stock prices will rise, as passengers seek out alternatives to railroad travel.
Diversification involves proactively balancing your portfolio across different investments. When diversifying, you take a defensive position instead of investing in the most profitable companies.
Importance of a diversified portfolio
- It’s a safeguard against investing risks.
Risks are inherent in investing. In spite of this, it is still necessary to secure your future and beat inflation. Portfolio diversification can help you mitigate some of these investing risks. Diversifying your investments reduces your exposure to sector volatility. - It provides you with the opportunity to tap into multiple sectors
You diversify your stock investments by investing in several different sectors. There is no way to predict when one of these sectors will perform exceptionally well and give you a high return. The stocks of many drug manufacturing companies rose during the COVID-19 pandemic, for example. You would have made huge profits if you had already invested in these companies to diversify. - You get consistent and higher returns
The stock market has historically been very volatile. Stocks alone cannot provide consistent returns on your investment. In addition, investing in safe assets like fixed deposits yields meager returns. The key to getting consistent and significant returns is investing in different asset classes. - It offers liquidity
Diversification of your portfolio has the main advantage that you can invest in a few liquid investments along with some safe investments such as public provident funds and fixed deposits, allowing you to get cash quickly when you need it.
While there are many advantages of diversification, it is simply not everyone’s cup of tea. If not done correctly, it could also cost you money. Many Indians therefore invest their money in fixed deposits or retirement funds provided by their employers. However, these investments are not enough to beat inflation and save for retirement.
In short, it is essential to diversify your portfolio in order to counter one of the biggest disadvantages of investing: the risk factor. You can also be at ease by diversifying your portfolio, knowing that at least some investments will yield returns even if the market is not entirely favorable. In addition, using the services of a professional may make investing easier and offer better returns.
Here’s where FLOATR fits into the picture
FLOATR is with you at every step of your financial freedom. The platform not only helps you save money but also it is a perfect companion where you can grow your wealth by investing.
We encourage you to diversify your investment portfolio by offering you a curated stock/equity basket of portfolios following the same themes, managed by professional stock advisors.
Apart from equity portfolios, you can also invest in fixed deposits, mutual funds, and digital gold and silver.
National Pension System – A Companion You Can Trust!
Let us walk through a scenario together—you are a thorough professional with a bright career. You have some savings for rainy days too, but what happens when your savings get used up and you are not able to earn anymore?
Retirement plans all over the world are prevalent in different forms. People invest in government and private pension schemes to have a sense of security and a retirement plan to rely on. Several pension schemes are offered in India as well, offering different plans of payment and several benefits.
What is National Pension System
The National Pension System (NPS) is a low-cost retirement option sponsored by the government. Any Indian citizen between the ages of 18 and 70 may choose to participate in the NPS program. It began in the year 2004 and became accessible to everyone in the year 2009. The Pension Fund Regulatory and Development Authority (PFRDA) is in charge of overseeing NPS .
The Pension Fund Regulatory and Development Authority (PFRDA), which was established by an Act of the Indian Parliament, administers and regulates the voluntary defined-contribution National Pension System (NPS).
The decision by the Indian government to discontinue defined benefit pensions for all new hires after January 1, 2004, marked the beginning of the NPS. Although the program was initially primarily intended for government workers, it became available to all Indian citizens in 2009. The government of India is attempting to establish a pensioned society using NPS. The NPS is currently easily accessible and tax-efficient under Sections 80CCC and 80CCD. An individual may fund his retirement account through the NPS.
This system has a variety of benefits for the public; some of them are listed below.
benefits Of National Pension System
- Secure Retirement: Investing in NPS can help you save up money in a systematic way to ensure a financially secure and wealthy retirement.
- Upfront Tax Benefits: When you invest in NPS, self investment up to 50k & 10% of basic through corporate NPS is completely Tax Exempt.
- Zero Tax on Maturity: Surprising but true, under the E-E-E category Zero LTCG Tax is due on maturity.
- High Returns: Market linked investment theme gives potential for high growth in the range of 8.5% to 12% CAGR.
- Least Expensive: The NPS is regarded as the least expensive pension plan in the world. The lowest fees include administrative costs and fund management fees.
- Easy to Use: All a potential applicant needs to do is open an account with one of the POPs offered by all Indian Head Post Offices and obtain a Permanent Retirement Account Number (PRAN)
- Flexible Options: The applicant has a range of investment options, including pension funds, to choose from. They can also pick Auto or Active choice for asset allocation.
- Accessible: The applicant can manage an account from any location in the nation, pay contributions through any POP-SP, regardless of the POP-SP branch with which the applicant is registered, and also contribute through eNPS, even if he or she changes cities, jobs, etc. If the subscriber secures employment, the account can be moved to any other sector, such as the public sector or the corporate model.
To summarize, financial security is very important at all stages of life, and a suitable pension system can prove a great support when you look for financial security post-retirement. The National Pension System is a great step introduced by the Indian government in this regard; it offers comprehensive pension support with flexible payment options.
NPS is a wonderful substitute for other investment options existing that offer an additional tax benefit. Certain tax benefits available under the National Pension Scheme that are worth mentioning are:
- Up to Rs. 1,50,000/ – u/s 80CCE (individual tax limit)
- Up to Rs. 50,000/ – u/s 80CCD(1B) (individual tax limit)
- Up to 10% of Basic Salary – u/s 80CCD(2) (Through Employer contribution)
As a result of NPS, you have a regular income source throughout your life, as the retirement corpus covers your regular expenses even after retirement.
Investing early brings a lot of advantages. For example, you start investing at the age of 25 with a monthly SIP of Rs. 7000 for 35 years of tenure. There will be a corpus of Rs. 7.75 crore. A monthly SIP of Rs. 25, 000 for 20 years will result in a corpus of Rs. 3.25 crores if you start investing at 40.
Invest today for a better tomorrow!
Rainy Day Fund: How To Prepare For A Financial Storm
What if you wake up one morning and receive mail that your service is no longer required at your office?
Are you ready to face the storm of rainy days with sound financial planning?
Life is unpredictable. Some days aren’t all sunshine, like when your car breaks down or your house needs a repair. Everyone encounters these situations at some point in their lives. That’s why it’s important to save while things are going well, so you’re protected when things go wrong. A rainy day fund can help you pay for unexpected bills beyond your normal living expenses.
Rainy day funds are set aside to take care of your monthly expenses + debts until you find another source of income. usually it should be somewhere 6 to 9 times of your monthly expenses including any loans.
What is the purpose of a rainy day fund? In the same way that you need to adjust your plans to accommodate unexpected weather, you should also have a financial backup in case of unexpected expenses. You might not anticipate a thunderstorm or a layoff, but either could happen at any time, so it’s best to prepare.
Looking at the current situation when even the giant companies are laying off, it’s a crucial step to save for rainy days. Not just in India, but globally IT layoffs have impacted more than 135,000 employees.
This recession is being followed by a pandemic, which has already caused immense stress on people globally and created almost a two-year-long period of increasing global uncertainty. And if the recession continues, there is going to be a definitive need for ensuring you take a relook at your finances.
Effective financial planning is extremely important, as managing finances and preparing for a rainy day can ensure you are secure no matter the situation. Be it an unforeseen expense, or a financial crisis – it is always important to make sustainable financial plans.
Once an individual gets a job, they should get insured with adequate insurance cover (life insurance and health insurance). This would help them to unburden themselves from expenses during a mishap. The second priority should be given to saving for rainy days for 6-9 months. After saving enough for those risky days, they can plan ahead for investing in mutual funds, pension schemes, equity, etc.
Let us look at some challenges in finance management
Monthly expenditure exceeding income: When your monthly needs and expenditure are more than the money you earn there is no scope for saving. Most people rely on EMI systems or Credit Cards but that is a hazard to effective financial management.
Living on borrowed expenses: One of the worst mistakes that people make is borrowing money from others. It is a vicious cycle and is never-ending where you borrow money, to pay others money. And should be avoided at all costs.
Not knowing how much you are saving: If you are unaware of the amount of money you save, you can never get hold of how much money you have or where your financial status stands. Financial status does not depend on how much you earn month on month but depends on how much savings you have.
Not knowing how to save: One of the biggest challenges is financial illiteracy. It is not only important to know how to earn money, but also know how to save. Understanding the different means and ways through which you can save money is extremely important and utilising them to work for you is essential.
Some people choose to save money rather than make investments. Savings, however, might not be sufficient to provide ongoing financial stability in a changing society. It might not be useful to keep idle money in bank accounts or lockers.
By increasing in value, investments may help reduce inflation. Compounding power aids in wealth building as well. Investing can also help you achieve long-term objectives like retirement planning, home ownership, and international travel.
Here are a few avenues for saving money:
- Fixed Deposits: One of the most popular investment options in India that offers a fixed rate of interest over a fixed period.
- Digital Gold: Gold has been amongst the most popular types of investment in India. As people are becoming more aware of the benefits of investing in digital gold, they are shifting to this option. One can invest in pure 24K digi gold without paying any making or wastage charges. On FLOATR, it starts with just Rs. 51!
- Mutual Funds: An excellent option for saving is mutual funds where there are options for lock-in periods or liquid funds that can be withdrawn anytime. One who is preparing to save for rainy days can start investing in mutual funds through SIP (Systematic Investment Plan) – investing a small amount of money periodically.
- Public Provident Fund and National Pension System: The PPF is a long-term savings plan supported by the Indian government with a 15-year lock-in period. PPF investments, however, are tax deductible and also rather secure. NPS (National Pension System) is a low-cost retirement option sponsored by the government. Any Indian citizen between the ages of 18 and 70 may choose to participate in the NPS program.
- Stocks: Stocks are risky but if well-planned can be effective in giving lifelong benefits to investors.
Here are some benefits of staying in control of your finances
- Staying in control helps you plan better for your future: By following correct financial management actions, defining a budget, and building a savings plan, you may forecast your income and saving capacities over time. This enables you to establish such plans and use them as inspiration to practise good budgeting and financial management.
- Reduce financial stress: Adults experience financial stress more frequently than any other type of stress. Money may not be able to make you happy, but it may help you sleep better at night and feel less stressed throughout the day.
- Being open to new opportunities: When your finances are in order, new opportunities may become available that were previously closed. Instead of focusing on the financial benefits, you may take advantage of the chance to examine new employment or career choices depending on what you’re most enthusiastic about.
- Being better prepared for uncertainties: When your finances are planned effectively, you can stay in control of your money and be better prepared for unforeseen situations.
How can you stay in control of your finances?
The world is going digital and having a digital partner to manage your finances is a good way to stay in control of your finances. FLOATR understands the challenges that a person faces while trying to stay in control. The biggest is trying to strike a balance between spending and saving.
FLOATR empowers individuals to achieve financial freedom by providing them with complete control of finance in an app-based system and also providing opportunities for financial management.
Here is what FLOATR offers:
Track Your Money!
FLOATR aids in preventing excessive spending and improper spending practices. You may record the areas where you spend the most money and compare your costs to your spending plan. By keeping track of your expenditures, you may reduce your expenses.
Achieve financial goals
With FLOATR, you may achieve financial freedom more quickly. You can also save for rainy days, develop a budget, set time-bound goals, allot money toward those goals, or invest in things like digital gold, equity baskets, mutual funds, fixed deposits, NPS, etc.
Insurance
What if a sudden mishap occurs? Would you break your savings or funds for that? A better option is to get insured or covered. FLOATR lets you save money and also choose the right insurance options for yourself. It also helps you plan and prepare for times of uncertainty. Begin your journey to financial freedom today.
