There are various types of stocks that investors can choose to invest their money in. Each type has its own unique risk and return profile. Understanding the different categories of stocks can help investors pick ones that best match their financial goals, risk tolerance and investment horizons. This blog post discusses 10 effective reasons why investors should consider allocating funds across different stock categories, rather than limiting themselves to just one type.
Diversify Across Industries
Investing in stocks from different industries helps minimise concentration risk and diversify one's portfolio. For instance, technology stocks help gain exposure to the high-growth tech sector, while consumer staple stocks provide stability during uncertain economic conditions. Having a mix makes the portfolio resilient across business and market cycles.
Match Goals and Timelines
Different stock categories are suited for different investment horizons. While high-growth stocks may require long holding periods to realise their full potential, mature companies offer steady returns in the short term as well. It's crucial to match investments with your planned timeline.
Gain Exposure to International Markets
Investing a portion of funds in foreign stocks provides valuable geographical diversification and currency hedges. It also allows investors to benefit from growth in overseas markets.
Acts as a Safeguard Against Inflation
Certain sectors like banking and commodities have stocks that can provide an inflation hedge. With inflation concerns rising, investors can deploy a portion of capital to these stocks to offset purchasing power erosion in other assets.
Tap Specific Sectors
Some sectors like technology and healthcare routinely outperform the broader markets. Focusing solely on broad market indices limits opportunities to benefit from the growth of these sectors.
Take Advantage of Emerging Areas
Investing a small allocation in emerging areas like clean energy, electric vehicles, 3D printing etc. allows exposure to nascent trends that reshape industries over the long run. Most such stocks are quite volatile, warranting only limited capital.
Gain Regular Income
Stocks offering high dividend yields generate regular income for investors. This can supplement earnings from fixed-income instruments for retirees and risk-averse investors needing regular payouts.
Leverage Small Cap Growth Potential
Though riskier, small-cap stocks offer higher growth potential compared to large caps which experience muted growth due to their size. Blending small caps with an overall portfolio provides further diversification.
Tap Turnaround Candidates
Some established companies with strong fundamentals experience temporary challenges and see their stock prices decline sharply, offering good value. Identifying and investing in such turnaround stocks at the right time helps gain outsized returns.
Manage Risk Effectively
Spreading capital across various categories enables effective risk management through diversification. Some stocks hedge risks in others. Losses in one category can potentially be offset by gains in another, minimising net portfolio fluctuations.
Conclusion
Allocating investments across different stock types offers stability, helps match objectives, provides diversification, gains emerging space exposure, and manages portfolio risks through diversification. Investors looking to generate wealth, in the long run, are well advised to deploy funds across different stock categories rather than limiting to just one type. Platforms like Kotak NEO make diversifying across various stock types quick and convenient by enabling easy account opening along with access to research reports required to identify opportunities across segments.