Individual investors now have more freedom to trade and take ownership of their investments thanks to the introduction of zero brokerage demat account. Even when trading often and without paying brokerage fees, investors should still recognize the value of diversification. The risks associated with individual security underperformance and market volatility can be reduced with a diversified portfolio.
What does a diverse portfolio entail?
When investments are dispersed throughout several asset classes, sectors, industries, and securities, the portfolio is said to be diversified. Since various asset types often behave differently in varying market conditions, this helps lower total risk. Bonds, for instance, might keep their value better during a decline in the equities markets. In a similar vein, other industries, such as banking, oil and gas, IT, etc., have distinct business cycles and do not always move simultaneously. Investing in a variety of sectors helps to reduce the portfolio’s reliance on any one area for performance. Diversifying across domestic and international markets and among large, mid, and small-cap stocks follows the same reasoning.
Diversification’s advantage:
The following are the main advantages of having a varied portfolio:
Risk reduction: Diversification, as previously said, lowers the total risk of a portfolio because different asset classes, industries, and market capitalization respond differently to various market circumstances. This guarantees some degree of protection against the negative.
Potential return: Although diversification lowers risk, it does not always result in lower returns. One can benefit from the positive returns of several asset classes and industries by having a diversified portfolio. A diverse portfolio provides a larger potential return over time than investments concentrated in a small number of securities.
Lower volatility: When opposed to investing substantially in only one or two stocks or sectors, a diversified portfolio will experience lower volatility. The value of the portfolio is stabilized over time as a result.
Inflation hedges: A variety of asset classes offer hedges against inflation. Bonds offer stability during inflationary times, but equities, commodities, and real estate typically do better. A well-balanced portfolio can handle a variety of economic situations.
The value of variety in a zero brokerage account:
When investing or trading often in a zero brokerage account, diversification becomes even more important for the following reasons:
Behavioural biases are prone to occur: Since there are no expenses, investors can be more inclined to trade more frequently in response to news or market cues. Behavioural biases like overconfidence and herd mentality may result from this. Emotions are restrained and disciplined by a well-diversified portfolio.
Losses from a single trade can be significant because there are no brokerage fees associated with each transaction, which encourages investors to take up greater positions in specific assets or trades. If the trade moves against expectations, this raises the possibility of huge losses. This risk is reduced by diversification.
Volatility can be increased: The mere act of trading frequently raises volatility and portfolio turnover. However, volatility is increased when trading activity is concentrated in a small number of preferred stocks or sectors. Stability is offered by a varied strategy.
Guards against black swan events: Nobody can foresee unusual occurrences that could have an unexpected negative impact on a particular stock, industry, or market. The portfolio is protected from these unanticipated risks via diversification.
Putting in Place a Diversified Portfolio:
Even when actively trading in a zero brokerage account, an investor has a few options for creating a diversified portfolio:
Asset Allocation: Based on your risk tolerance and time horizon, choose the best possible distribution of your assets among the main asset classes, such as debt, stock, and gold. An investor in their thirties, for instance, would allocate 70% to equities and 30% to debt.
Sector Allocation: Divide your equity holdings among several industries, such as banking, IT, energy, FMCG, etc., according to how much of each industry the market weighs overall. A 10-15% allotment to each key sector, for instance.
Invest in large, mid, and small-cap stocks in your portfolio to achieve market cap allocation. While tiny and mid-sized caps offer development potential, large caps offer stability. A split of 30-40-30 or 30-30-30 works nicely.
Selecting Stocks: Choose 8–10 stocks per industry or market cap range. Do thorough research and select from a variety of subsectors to increase your diversification.
Give 10–15% of your portfolio to international markets, to diversify your risk and take advantage of international opportunities.
Debt and Gold: When allocating funds to fixed income and commodities, consider including gold/gold ETFs, gilt funds, and premium corporate bonds.
Maintaining the initial asset allocation and locking in profits from outperforming investments requires periodic portfolio reviews and rebalancing, say once every quarter.
Mutual fund investors who lack the time to conduct research can attain diversification with minimal effort by selecting diverse equities, debt, and gold mutual funds.
Controlling Concentration Risk:
Despite diversification, there is still a chance that concentration risk will eventually find its way into the portfolio.
– Periodically review sector and stock weights to ensure they remain within set parameters and market weights.
– Regularly book profits from investments that have increased in size as a result of price appreciation.
Initially, keep your exposure to specific stocks to no more than 5–10% of the value of your portfolio.
– Use trailing stops depending on price and volume to limit large gains in a select few positions.
Increase the frequency of rebalancing if active trading significantly raises portfolio turnover.
If your equity exposure exceeds 60–70% as a result of market fluctuations, think about diversifying into other asset types.
Rather than being a one-time event, diversification is a continuous process. To sustain the best long-term risk-adjusted returns in a zero brokerage account, regular reviews and modifications are necessary.
By submitting basic KYC documents and completing an application form, investors can quickly and conveniently open demat account online in a matter of minutes.
Conclusion:
In summary, even though zero brokerage accounts provide investors with a lot of advantages, it’s critical to stick to a diversified portfolio strategy. Long-term return optimization and effective risk management are facilitated by this. In a zero-cost trading market, diversification is a straightforward yet effective notion that helps investors gain no matter how actively they trade.
