How Bonds Can Help Investors Diversify Their Portfolio3 min read
“Don’t put all your eggs in one basket”
This quote is perfect when discussing portfolio diversification. Diversification is the process of spreading investment risks across multiple asset classes.
How do you diversify your portfolio effectively? You must first understand the asset class mix you intend to use to reach your financial goals. As a result, in order to achieve the optimal mix, you must first understand the correlation between those asset classes.
Diversification can protect us from a sharp drop in portfolio returns. Our returns remain consistent with our expectations when we have a well-diversified portfolio. When one asset falls, the other either remains stable or rises. This is how we can reduce the overall risk of our investment.
To reduce portfolio risk, we must construct a well-diversified portfolio. We must understand the correlation between two assets and invest in those that are negatively correlated with each other.
What Is A Bond?
Bonds are fixed-income instruments that are one of the three main asset classes, commonly used in investing.
In simple terms, A bond is a loan from an investor to a borrower, such as a company or government. The borrower uses the funds to fund its operations, while the investor earns interest on his or her investment. A bond’s market value can fluctuate over time.
Bonds are regarded as a defensive asset class because they are less volatile than other asset classes such as stocks. Bonds are commonly included in portfolios as a source of diversification to help reduce volatility and overall portfolio risk.
One can invest in corporate bonds, government bonds, and so on.
How To Invest In Bonds?
Bond ETFs are one way to invest in bonds. Bond ETFs are passive investments that trade on exchanges in the same way that stock ETFs do.
Bond platforms like Wint Wealth are another option for investing in bonds with a small ticket size of say Rs. 10,000. To invest, you must first open a trading account on one of these platforms after completing the KYC procedures.
Another way to purchase government bonds is through direct investment. You only need a demat account and a trading account with a brokerage firm. Once you have them, you can purchase and sell bonds as you see fit. RBI Retail Direct, launched last year in November, provides another opportunity for investors to invest in bonds.
Conclusion
Diversification of the portfolio is as important as the selection of asset classes for investing. One should remember that rather than investing in the asset classes having a positive correlation, one should invest in those asset classes that have no correlation or are negatively correlated.
If all of our portfolio’s holdings are successful at the same time, we should brace ourselves for the time when they all fail at the same time.
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