How to diversify your portfolio with ETFs

Diversifying your portfolio helps mitigate the risks of losses due to market volatility. With equity investments, you must research and invest in various sectors and industries to make your portfolio immune to market fluctuations. Mutual funds automate the process as professional fund managers invest funds on your behalf.

Among various types of mutual funds, ETFs provide extensive portfolio diversity and have low maintenance costs, which fetch decent returns. That’s the reason why several investors choose to invest in ETFs.

If you are a new investor willing to invest in exchange traded mutual funds, read below to learn how to diversify your portfolio.

Why should you diversify your portfolio?

Risk mitigation and optimised profits are the two most important reasons for diversifying your portfolio. You can also achieve multiple financial objectives through portfolio diversification, such as capital gains, liquidity, tax savings, etc. You must research the market and choose suitable funds and other investment opportunities for effective diversification.

When you diversify your portfolio, adverse market fluctuations in one sector or industry get balanced by other sectors, and your investments remain immune to significant losses. Among various investment options, ETFs can help you diversify your portfolio with low maintenance costs across sectors and assets.

How to achieve diversification through ETFs?

Exchange Traded Funds offer a variety of investment opportunities across equities, securities, commodities, and bonds. Depending on your financial objective, you can choose your investment type across sectors and diversify your portfolio. Here are some common ETF instruments to invest in for diversifying your portfolio.

1. Equity ETFs

Equity ETFs can help you diversify your portfolio by investing  in various listed companies. The ETFs trade the same way as stocks in the market, offering quick liquidity. You can choose an ETF based on market capitalisation or based on sector.

Exchange traded funds track an index which means that they hold the same stocks in the same proportions as the underlying index

Sectoral ETFs track the performance of a particular sector, such as banking, PSU, IT etc. If you have a strong view of a specific sector and are confident about its prospects, you can choose a sector ETF for portfolio diversification.

2. Debt ETFs

Debt ETFs are another decent means to extend your diversification. However, currently, you may find limited investment options in debt ETF instruments as most debt ETFs focus on liquid funds, gilt , and government and PSU debts.

3. Gold ETFs

Gold ETFs track and monitor the price of domestic physical gold. Investing in  gold or any metal directly is not always a good choice. When you invest in these through an ETF, the investments are held electronically, and you can purchase as low as one unit.

Gold ETFs are one of the most viable options since your purchases and possession are held digitally. It also helps you save on making and storage charges associated with physical gold.

If you are new to investment, your primary focus must be portfolio diversification to make it immune to market fluctuations and provide stable returns. Exchange Traded funds are among the most preferred investments for portfolio diversification as they are affordable due to low management expenses.

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