Wealth Guide: Importance of portfolio diversification, tailored solutions and unique investment

It is imperative for investors to implement diversification across asset classes, sectors, market capitalisation, and investment styles while constructing a portfolio, in line with the investor's risk-return profile and investment horizon.

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Rajesh Cheruvu – Chief Investment Officer – Validus Wealth decodes why should investors diversify their portfolio to maximise wealth and minimize risk -  

Diversification and regular rebalancing help manage the risk and volatility of the portfolio and hence lead to achieving predetermined financial goals. In layman's terms, diversification means not having all eggs in the same basket.

Through diversification across investments with lower correlation, the portfolio is less likely to lose money on all investments at once, thereby reducing the risk in the portfolio while still providing opportunities for portfolio growth.

However, investors need to strike a balance by optimising between over and under diversification, as both extremes could do more harm than good to investor portfolios against their expectations.
 
Tailor-made portfolios are designed to construct a portfolio that reflects factors like the investor's specific preferences, convictions, personal beliefs, tax liability, and risk appetite.

These highly customized portfolios are gaining popularity with sophisticated High Net-Worth and Ultra High Net-Worth Investors who understand the asset classes and sub-asset classes they are investing in.

Hence, investor suitability as per risk-return profile and the investor's knowledge of the investments are to be considered.
 
Investors can also add certain unique investments to their portfolio, such as investments in the early and expansion stages of the private company life cycle. These include Private Equity, Private Debt, Venture Capital, Venture Debt, etc.

Such investments bear liquidity risk but provide benefits of non-correlated returns with other asset classes and have tremendous scope for long-term wealth creation. These are part of the Alternative asset class allocation.

However, given the liquidity constraints and the need to hold for more extended periods, these investments might not suit every investor.

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)