Importance of a diversified portfolio
The importance of a diversified portfolio is listed below,
1. Volatility: A diversified portfolio has the capacity to reduce the risk factor associated with each asset class invested in the market.
2. Benefits of Different Investment Options: Different investment options namely mutual funds, exchange-traded funds, fixed deposits, etc can help investors to take benefit of the different features of each instrument and reduce risk. Suppose, you invest in fixed deposits, you can receive fixed interest at lower risk. If you invest in mutual funds, you have the potential to earn higher returns with equal higher risk.
3. Preservation of Capital: Investors seek to preserve their funds either by taking risks or by preferring stability. Portfolio diversification is able to help investors in fulfilling their desires. Investors are able to achieve their desired financial goals because of diversification which limits the risk of individual investment.
4. Management of Risk: With a diversified portfolio, an investor is able to generate weighted average returns for the underlying securities on which investments were made. Thus, they won’t be fully exposed to the market volatility and also the risk associated with a single security.
5. Peace to Investors: Among all the advantages, one of the best advantages is that a diversified portfolio provides a peaceful life to the investors. When the total capital is distributed among different assets, an investor will be chilled out with taking stress about the performance of the portfolio.