It is every investor’s goal to receive high returns from his investments while keeping the risk at its minimum, but one factor that every investor is not aware of is the role played by the diversity in investment portfolio in maximization of the returns and minimization of the risk.
The success of investments does not only depend upon the extent of capital invested or the investment avenues invest in, it depends mainly upon the way the investment portfolio is maintained. It is highly important to maintain a well diversified investment portfolio in order to ensure that the investment risk is managed efficiently.
Diversified Investment Portfolio
Investors can maintain a well diversified investment portfolio by making investments in numerous investment avenues that are not related to each other. This way, a negative trend in one investment will not influence the other investment. Many experts have tried to define a perfectly diversified investment portfolio but not all of them agree with the outcome. However, there is one factor that remains the same i.e.; the investment portfolio should hold securities that belong to independent groups and are not influenced by each other. Following is a brief introduction to the types of securities that can be included in a diversified investment portfolio:
These are the type of investment that every investor is aware of. Equity securities are traded at stock exchanges and this is the first investment avenue that is explored by most of the investors. The fair value of equity securities keeps changing due to a number of factors including the anticipation among the investors with regard to the prospective financial performance of the company. Equity securities are a feasible option for maintaining a diversified portfolio because there are a large number of companies that are independent from each other and that hold different business objectives. Therefore if one company’s financial performance is affected, it does not have any impact on the financial performance of another company that is from another industry. Therefore, investment risk can be minimized significantly by making investments in the equity securities of companies that are independent from each other.
Individual investors may not be aware of these securities because these usually require a significant amount of capital, and such an amount can only be provided by organizations. However, some government securities are easily accessible by public such as; bonds and treasury bills that are issued by the government. These securities are considered to be secure because they are properly structured and they have a predictable pattern of cash flows.
Mutual funds have managed to gain a stable position in the market due to their nature. Mutual funds act as an intermediary between investors and their investment portfolios. They usually have a diversified investment portfolio in which all the investors invest collectively and the mutual fund management company charges a fee against its services.
Importance of a Well Diversified Investment Portfolio
Maintaining a well diversified investment portfolio is important because it helps in the minimization of the risk of devaluation of the investments. Invest in a group of companies that belong to the same industry may not be a good idea because one’s financial performance influences the other’s. However, investing in a well diversified manner can save the investors from such a scenario. Maintaining a diverse investment portfolio is important if an investor seeks to ensure that the risk in his investments remains at minimum and the returns remain at their maximum.