Diversification is key in financial investments

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EVER wonder why mom and pop stores sell wildly unrelated products side by side, like umbrellas and sunglasses, or Halloween candy and screwdrivers? Customers probably would never buy these items on the same shopping trip, right? That's exactly the point.

 

By diversifying their product offerings, vendors reduce the risk of losing sales on any given day, since people don't usually buy umbrellas on sunny days or sunglasses when it rains.

The same diversification principle also applies in the investment world, where it's referred to as asset allocation. By spreading your assets across different investment classes (stock mutual funds, bonds, money market securities, real estate, cash), if one category tanks temporarily, you may be at least partially protected by others.

 

You must weigh several factors when determining how best to allocate your assets:

Risk tolerance: This refers to your appetite for risking the loss of some or all of your original investment in exchange for greater potential rewards. Although higher-risk investments (like stocks) are potentially more profitable over the long haul, they're also at greater risk for short-term losses.

 

Ask yourself, would you lose sleep investing in funds that might lose money or fluctuate wildly in value for several years; or will you comfortably risk temporary losses in exchange for potentially greater returns? Time horizon: This is the expected length of time you'll be investing for a particular financial goal. If you are decades away from retirement, you may be comfortable with riskier, more volatile investments. But if your retirement looms, or you'll soon need to tap col lege savings, you might not want to risk sudden downturns that could gut your balance in the short term.

Diversification within risk categories is also important. From a diversification standpoint it's not prudent to invest in only a few stocks. That's why mutual funds are so popular. They pool money from many investors and buy a broad spectrum of securities.

Thus, if one company in the fund does poorly, the overall impact on your account is lessened.

Typically, each portfolio is comprised of various investments that combined reach the appropriate risk level. Usually, the more aggressive the portfolio, the higher percentage of stocks it contains (that is, higher risk/higher reward).

Another possibility is the so-called "targeted maturity" or lifecycle funds offered by many 401(k) plans and brokerages.

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Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.

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These Application Forms can be used for buying regular mutual funds also

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1. ICICI Prudential Tax PlanInvest Online
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4. Reliance Tax Saver (ELSS) FundInvest Online
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6. IDFC Tax Advantage (ELSS) FundInvest Online
7. SBI Magnum Tax Gain Scheme 1993Invest Online
8. Sundaram Tax SaverInvest Online
9. Edelweiss ELSS Invest Online

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