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Why Is It Important To Go With The Portfolio Method Of Investing?

mahindra-finance-author

by Mahindra Finance

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June 30, 2023

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4 mins read

Most investors choose to invest in a single type of fund. It could be mutual funds, SIP, debt, equity, or something else. However, portfolio investment allows you to choose various options to invest in. It diversifies your options. Thus, you can invest in mutual funds, SIP, debt, equity, and everything else without any restriction. That’s the primary objective of portfolio Investment.

Often, it is interchanged with terms like asset or wealth management. Even portfolio management gets tossed around a lot. The objective of portfolio management is to understand the investor’s risk appetite. Accordingly, you receive options to invest in the market to help you meet the financial goals by assessing your risk tolerance.

Portfolio investment can be in a single segment of the market or the entire industry.

Example Of Stocks And Bonds - Returns & Risk Management

Let’s take two primary examples. Bonds are the safest investments, while Stocks can be unpredictable or risky. A person with portfolio investment can decide to split the funds according to their risk appetite (or tolerance).

In other words, you can split it 50% in stocks and the remaining in bonds. Alternatively, if you want lower risk, you can increase the investment in bonds. Vice-versa if you’re going to increase the risk and returns.

This is how portfolio management primarily works. It attempts to understand the investor, mitigate the risk as much as possible and increase income.

Reasons To Opt For Portfolio Method Of Investing

Now that you understand what the portfolio method is, it’s time to determine its relevance to you. First of all, portfolio investment is a choice. It is not something you ‘have to do in the investment market. However, given below are the reasons or criteria for you to consider this option:

1. To Diversify Your Investment

The entire gimmick of portfolio investment is to ensure that you can diversify your profile as an investor. You can invest in various assets, bonds, stocks, and even cryptocurrency. The objective is to enrich your profile, safeguard your funds and mitigate the risks.

2. Generate A Steady Income

It could depend on the options you choose, but portfolio investment majorly provides a constant income flow. Regardless of the options you choose, there will be some percentage of income you can gain. It happens with the diversity of the investment. If you’re someone who likes to play moderate to high-risk and seeks regular income generation, portfolio investment might be excellent for you.

3. Significantly Mitigate Your Risk

As mentioned earlier, you can change the assets you seek to invest in by understanding your risk appetite. However, even if you have a higher risk tolerance, you can drastically reduce the risk factor or disaster as there will be multiple investments. Thus, even one of the tanks, others can mature for lucrative returns or gains. So, whether you’re a high-risk investor or on the opposite end, you will always manage risk better.

4. Cost-Efficient Option To Invest

Portfolio management requires minimal asset management and would correlatively reduce transaction costs. Additionally, if you choose to invest in securities, it will reduce the social cost of investment. According to the investment profile, there are many other additional costs that you can reduce if you choose a portfolio method.

Bottom Line

Of course, there are some downsides to the method. For instance, it requires more diligent research and understanding of the financial market.

Overall, the portfolio investing method is excellent for everyone, from a beginner (novice) investor to a veteran. If you want to invest in mutual funds, SIP, and other assets, it is among the best diversifying options.

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