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Maintain an Optimum Investment Portfolio: Minimize Risk and Earn High Returns

24 October 2012 One Comment

Do you want to know the secret to receiving high returns from your investments while keeping the risk at its lowest? It is not the amount of capital you have invested, it is not the rate of return being offered on your investments, but it is the extent of diversity in your investment portfolio.

This post will help you understand this secret and assist you in its practical application.

What Is a Diversified Investment Portfolio?

If put in the simplest words, diversified investment portfolio can be maintained by making investments in several investment avenues that are distinct and independent from each other. What constitutes a perfectly diversified investment portfolio is a question that does not have a definite answer. Different financial experts have presented different views with regard to the diversity of investment portfolio and some of the views are contradictory as well. However, the factor that remains common in all the views is; the portfolio must have securities that can be easily classified into distinct groups which are not affected by each other’s financial performances. In order to understand the different types of securities, following is a brief introduction of each of the types:

 

Equity Securities

Equity securities are the most basic type of investment. These are the stocks that are publicly traded and the sale price of these stocks keeps fluctuating and it is determined by a number of factors at the stock exchange. A diversified portfolio can be maintained by investing merely in equity securities because there are a number of different companies with completely different objectives. For example, if due to industrial factors, a company’s financial performance is influenced, another company that belongs to another industry will remain isolated from such impact. Thus, if the investments are maintained in different companies in different industries, risk can be minimized by a significant degree. Even if the value of one of the investments declines, other investments will not be influenced, and in some cases, such a scenario will be a heads-up for the investors to reconsider the investments.

Government Securities

Government securities include different bonds and treasury bills that are issued by the government for raising finance from public. These investments are considered to be the most secure type of investments as they have a predefined return and a short term maturity. Some securities have maturity period of as low as six months, while most of the securities last up to three years with semi-annual profit payments.

Mutual Funds

Mutual funds are rising in popularity as investment avenues due to their very nature. If the basic nature of the business is taken into consideration, mutual funds invest on behalf of the unit-holders. There are many types of mutual funds based on their investment portfolios. Balanced fund is considered to be the most optimum type by most experts as this fund holds the most diversified investment portfolios. Balanced fund includes investments in equity securities, government securities, term finance certificates, and other mutual funds.

Why is Diversified Investment Portfolio Important?

The most important aspect of maintaining a diversified investment portfolio is the minimization of the risk of devaluation of the investments. If you invest in a group of companies but they all belong to the same industry, the financial performance of the companies may follow a similar pattern. Even if the financial information of the investee company shows a positive trend in the profitability, it does not make it certain that the company will keep giving out high returns in the future. Although financial analysis conducted on the financial information of a company indicates the direction of the prospective financial growth of the company, making a significant investment in a single group of companies based merely on predicted financial performance may not be an optimum decision. Maintaining a diverse investment portfolio is essential if you want to ensure that the risk in your investments is at its minimum and that you receive high returns.

Now that you have uncovered the secret for making the most of your savings, you can start evaluating different investment avenues to maintain the best investment portfolio.

This is a guest post blog provided by Andrew at Student-Finance.com.au. Andrew has written an much content to help students through a period of study, including a recent article on how students can make money by selling on ebay.

One Comment »

  • Aram Durphy said:

    If you hold a diversified portfolio of equities and bonds, you can eschew mutual funds. Funds are great for those that don't want to do research or hire a fee-only advisor to do the research for them. I would also add, that ETFs are usually superior to mutual funds because fees are an order of magnitude lower and broad indexes outperform many mutual funds. So, if you do not want to create your own diversified portfolio of individual securities, consider ETFs.