Diversification is important when you are risking your money in stock market. Though there are exceptional benefits in investing in shares, there are risks that come along with it. Diversification is considered as a part of your investment strategy where you distribute your portfolio across various assets, so that your capital is safe.
Here are some of the benefits of diversification and distribution of your portfolio:
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Reduced Volatility:
Distributing your portfolio across stocks, bonds and cash can lower your overall exposure to market volatility and average your returns. The reason being when one sector in the market is falling in value, there are other sectors that are performing well.
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Keep Building:
Investments on regular basis builds your fund value. This approach helps in taking advantage of market volatility.
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Different Investment Styles:
A value manager tends to consider, among other things, the fundamental strength of a company and its management team, and whether that company’s stock price is undervalued based on estimates of its true worth. A growth manager doesn’t necessarily take into consideration the price of the company’s stock. Instead, it considers how fast the company has been growing and whether new products or other competitive advantages should accelerate earnings in the future, which would likely benefit the stock price.
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Protect and grow your investments:
Once you understand the full benefits of diversification, you’ll find it easier to start practicing it in your own life. You simply need some good financial guidance and a healthy dose of patience. Diversifying your portfolio won’t bring you quick riches, but it will steadily build wealth over time.
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Tax Saving:
Diversification can also be a great way to save tax on profits earned. Investments made in many government bonds, insurance schemes and mutual funds is also exempted from tax. A person looking to make good return on investment while saving tax can use these asset classes, and diversify his portfolio while keeping some extra cash as tax savings.
