Building a diversified investment portfolio is like constructing a sturdy house – you need a strong foundation, various materials, and careful planning to withstand any storm. Similarly, for your financial well-being, creating a diversified investment portfolio is crucial. It is not just about growing your wealth; it is also about safeguarding it against market fluctuations and uncertainties. This is especially true for NRIs (Non-Resident Indians) who seek investment opportunities in India while ensuring stability and growth. In this guide, discussed are the importance of diversification and the ways to build a diversified investment portfolio tailored for wealth growth and stability, with a focus on NRI investment plans.
Importance of diversified investment portfolio
Diversification is the concept of spreading your assets over several asset classes, industries, and geographic areas. The fundamental objective is to limit risk while optimising reward. In a volatile market like India, where economic conditions frequently shift, diversification serves as a buffer, safeguarding your investment from major losses. It mitigates the impact of any negative occurrences that may affect a certain asset or sector, ensuring that your portfolio is robust over time.
Here are techniques to establish a diverse investment portfolio for wealth development and stability, particularly geared to NRIs –
Ø Index funds
Index funds passively monitor a certain market index, such as the Nifty 50 or the Sensex. These funds mirror the underlying index’s performance by owning the same stocks in equal proportions. Since they have lower management fees compared to actively managed funds, index funds offer cost-effective diversification. By investing in index funds, you gain exposure to the broader market while minimising the risk of underperformance compared to the benchmark index.
Ø Equity mutual funds
Equity mutual funds pool money from investors to invest in a diversified portfolio of stocks. Large-cap funds invest in well-established companies with a large market capitalisation, providing stability. Mid-cap and small-cap funds invest in smaller companies with higher growth potential but higher risk. By investing in a mix of these funds, you spread your risk across different segments of the market, balancing stability with growth opportunities. This is considered one of the best NRI plans for proper wealth growth.
Ø Debt instruments
Debt instruments such as corporate bonds, government bonds and fixed deposits endow stable returns with lower risk than equity funds. Government bonds are the safest as they are government-backed. Corporate bonds endow higher returns but carry credit risk linked with the issuer’s potential to repay the debt. FDs endow a fixed rate of interest for a specific time period, providing capital protection and predictable returns.
Ø Gold ETFs
Gold ETFs invest in physical gold bullion. Such investments act as a hedge against currency fluctuations and inflation, preserving the portfolio value during economic downturns. Gold ETFs offer convenience and liquidity since they can be bought and sold like stocks on stock exchanges. By including gold ETFs in your portfolio, you diversify across asset classes and reduce overall risk.
Ø Real estate investment trusts (REITs)
REITs are listed entities that own and manage income-generating real estate properties. By investing in REITs, you gain exposure to the real estate sector without the hassle of property management. REITs distribute a major portion of their rental income to investors as dividends, offering regular income. Additionally, REITs provide liquidity since they are traded on stock exchanges, allowing investors to buy and sell units easily. With the potential for capital appreciation and steady income, REITs enhance portfolio diversification.
Ø International funds
International mutual funds or exchange-traded funds (ETFs) invest in stocks and bonds of companies and governments outside India. By diversifying globally, you reduce the risk associated with investing in a single country or region. International funds provide exposure to different economies, industries, and currencies, offering opportunities for growth and risk mitigation. Investing internationally also allows you to benefit from global trends and technological advancements that may not be available in the market.
Ø Public provident fund (PPF)
The government of India offers a long-term savings system known as the PPF. It provides tax benefits under Section 80C of the Income Tax Act as well as a set interest rate, which is currently greater than that of bank fixed deposits. PPF has a 15-year lock-in period, making it ideal for long-term financial goals such as retirement planning. Investing in PPF allows you to develop a tax-efficient savings corpus with capital protection and assured returns.
Ø Systematic investment plans (SIPs)
SIP is a disciplined investment strategy in which you put a certain amount of money into mutual funds on a regular basis. By investing regularly over time, you can take advantage of rupee-cost averaging, buying more units when prices are low and fewer units when prices are high. SIPs assist in reducing the impact of market volatility on your investments while also instilling discipline in your investing habits. SIPs allow you to start small and progressively raise your investment as your income rises.
Ø National pension system (NPS)
The PFRDA or Pension Fund Regulatory and Development Authority regulates the NPS plan, a voluntary retirement system. It offers distinct investment possibilities, such as corporate bonds, stocks, and government securities. As an NRI, you must know that NPS permits you to form a retirement fund while receiving tax benefits. NPS endows your freedom and control over your market investments, permitting you to customise your investment portfolio based on your retirement goals and risk appetite level.
Ø Health insurance
Health insurance policy endows financial protection against healthcare expenses caused by accidents, hospitalisation or disease. It covers hospitalisation expenses, before and after hospitalisation bills, ambulance costs and other expenses. With rising medical expenditures, having proper insurance coverage is essential for protecting your finances and avoiding fund depletion during medical exigencies.
Ø Professional advice
Seeking expert advice from financial experts specialising in NRI investment plans can assist you make better decisions. A financial expert evaluates your financial scenario, risk appetite level and investment goals to suggest suitable investment tips and strategies. They endow customised guidance, portfolio management services and insights into financial markets, enhancing the investment strategy’s effectiveness.
You must develop a diverse investment portfolio for wealth stability and growth by applying the strategies mentioned above. Note that financial success requires considerable patience and long-term vision.