1. Vertical diversification/Investment across assets classes or categories: To arrive at a healthy investment portfolio, diversifying across different investment options including debt, equity, gold and other retirement products such as PPF etc.,. shall hold you in good stead. As a likely steep fall in the value of one of your investments can be to an extent offset by the rise in the value of the other asset.
2. Horizontal diversification/ Diversification within the same asset class: After you are done with the basic strategy that requires you to invest in different asset class, you should also diversify in the same asset category. What this implies is that you ought to not concentrate your portfolio into equity by just betting on large cap or mid-cap or small-cap funds. Instead the diversification should be done across market capitalization or M-cap as well as sectors. As if an individual over-invests in stocks of a particular industry, any likely future event that is detrimental for the industry shall devalue his investment to a high degree. So, diversification in an asset class is also to be followed.
In the mutual fund category also you can spread your investment into funds that invest in mid-cap or multi-cap or large-cap or into a fund that invest into a healthy mix of such funds. Debt category also offers you options to diversify your investments within the class.
3. Portfolio rebalancing: On the basis of the market outlook, you need to time and again rebalance the portfolio such that overall asset mix is maintained to be same. In a case when a certain investment earns you substantially, you can offload that and put your bet on some asset that is then undervalued. To read more on portfolio rebalancing click here.
4. Distribute investments over time: The strategy will enable an individual to indulge in regular saving and also he shall be in a position to leverage different interest rate cycles.
5. Diversify geographically: Though, effects of economics of a particular country are felt by other economies as well in the global world, still the correlation is not too close. So, you can consider to plunge part of your investment into global or international mutual fund offerings. For steady gains in a case when the domestic economy is under stress, the step can be taken. However you need to judge whether you have the appetite for the international investment product or not.
6. Over-diversification needs to be put at bay: Over-diversification does not definitely mean over-investment or focusing on the quantity part, instead you should opt for investment options that you consider have the potential to yield substantial gains over time. Likewise, if you invest a meagre sum in too many asset classes, any steep rise in the value shall yield only marginal returns. And always there is always a hassle associated with keeping a track of so many investments.