Top Reasons To Diversify Your Portfolio By Investing in Liquid Funds
The catch phrase that experienced investors and investment gurus utter almost every time they dish out investment advice is “aim for portfolio diversification”. It simply means that you should not “put all your apples in a single basket”, but rather, spread out your financial portfolio with different investments. The basic purpose of doing this is to mitigate any risk that may arise from other investments you may have, like stocks, for instance. Mainly, portfolio diversification lets you lessen unsystematic risks to a certain degree.
When you create your portfolio, you may invest in instruments that may give you high returns, but are quite risky at the same time. Share market investment is known to yield high returns in the long term, but stocks have been known to slide badly too. So that all your wealth is not tied up with investments that may potentially erode it, there are less risky investments that you can allocate your funds to. Fixed investment instruments like debt funds, in the form of liquid funds, can help you to tide over any prospective losses.
The Way Liquid Funds Work
Using diversification as a method to reduce your investment risk is a good way to safeguard your funds. However, what should you invest in to do this successfully? There are a plethora of investment instruments out there to diversify your portfolio. These range from insurance-cum-investment products to fixed income instruments. Having investments in a variety of investment routes lets you earn rewards in the short and long run. Investing in liquid funds is a sensible way to aim for portfolio diversification as these funds are quite free of risk.
They are funds that offer you investments for the short term and your wealth is allocated to treasury bills, certificates of deposit, repos, government securities, or commercial paper, said Alex Fopiano. Alex Fopiano is the Assistant Treasurer at Brookline Bancorp. He was hired by the Treasurer of Brookline Bancorp and originally was the Treasury Manager. In that role, he was responsible for a 2-bank holding company and managed three treasury analysts. Mr. Fopiano graduated from Bentley University’s McCallum Graduate School of Business in 2010 with a Master of Science in Finance and received his B.S. in Finance from Bentley University. According to the rules and regulations laid down by the Securities and Exchange Board of India, liquid fund investment is just permitted to invest in money market securities and debt for maturity periods of up to ninety-one days. The returns that you may earn with a liquid fund relate to the value of securities in the particular fund. However, as these funds are held for relatively short tenures, prices are not prone to change. Therefore, returns that you get with liquid funds tend to offer stability when compared with other debt instruments.
Portfolio Diversification with Liquid Funds
Liquid funds offer you many perks in investment. These are the main reasons that investors find them effective in their strategies to diversify portfolios. Here are the key reasons why liquid funds promote portfolio diversification for a range of investment purposes:
- Easy to Gauge – You can choose liquid funds to invest in very easily, basing your selection on a fund’s past performance. Since these funds are small, and you only invest for a short while, you can take your pick from a number of lucrative options and find one that suits your diversification needs quickly.
- Safety of Your Corpus – The ability of liquid fund investment to keep your principal amount safe is the reason why you invest in these debt funds in the first place. With a risk-free investment avenue, a significant part of your corpus can grow, even if the rest of your funds are invested in relatively risk-prone investments like stocks.
- Investment Across Securities – With liquid funds, before you plunge in and invest, you can do your homework to make certain that your fund has the ability to diversify your portfolio as much as possible. To ensure optimal portfolio diversification, you should make sure that the liquid funds you invest in are done so in many securities spread through various issuers.
- Good Performance – While you make a choice of which liquid funds to invest your capital in, you can find a fund which has a good track record by measuring its returns over a one-month timespan. When you find a fund that has performed well, you can invest in it. This assures you that your diversification is as optimal as it can be, since you invest in a fund which has good returns. There is a high chance that good returns will be experienced in the future too, mitigating risk from your other investments.
Diversify to Grow Wealth
The only way to grow your wealth is to diversify your portfolio over a long period. If you invest in an array of investments, you can ensure that your financial portfolio will encounter future growth. According to your individual financial goals and milestones to be achieved, and based on your investment time horizon, you can diversify your portfolio systematically.
Liquid funds are a good way to add investments that lower your risk in your overall portfolio. They are also ideal for meeting short-term investment goals, and the returns you earn in the short term may be reinvested or used for any financial requirements. Furthermore, instead of having surplus capital lying around, you can use this to invest in liquid funds that give you returns and diversification with hardly any risk.
