- Banking Tips
- Investment Tips
- Money Management and Budgeting Tips
How to mix investments
Investments are mixed basically for two reasons:
Achieving financial goals
For example: Short term investment, long term investments etc.
To reduce risk through allocation of assets.
Asset allocation: The objective of asset allocation is reducing risk of putting all eggs in one basket. Asset allocation to a large extent depends on the time horizon you have in mind, and how much risk you can afford to take. Usually, younger people have longer time horizon, and hence they can invest major portion of their money in equity. While older people cannot afford to invest a large amount in equity, because of high risk associated with it. Asset allocation or diversification helps investors diversify the risk, because different asset classes are not impacted in the same way by market fluctuation.
For example: The impact of market fluctuation is highest in equity, less in bonds, and almost nil in bank accounts and government scheme. Macro-economic factors such as interest rate and inflation impact bonds and bank accounts more, but have less impact on equity.
Investing on different types of companies: One way to diversify investment can be investing on companies that represent different sectors of the economy
For example: Technology companies, manufacturing companies, pharmaceutical companies, and utility companies.
- Buy Shanchay patra from different issuers: Similarly, if you're buying bonds, you might choose bonds from different issuer and corporations as well as those with different terms and different credit ratings.
Short term bond vs. Long term bond: Similarly, there are periods when intermediate-term bonds—Government Bonds-provide a stronger return than short- or long-term bonds from the same issuer. Rather than trying to determine which bonds to buy at which time, there are different strategies you can use.
For example: You can buy bonds with different terms, or maturity dates. This approach involves investing roughly equivalent amounts in short-term and long-term bonds, weighting your portfolio at either end. That way, you can limit risk by having at least a portion of your total bond portfolio in whichever of those two subclasses is providing the stronger return.