What strategies can improve your portfolio's diversification?

I have seen this quite often that certain risk averse investors or family offices allocate capital according to their future requirements of cash. For e.g. a particular family office the Investment advisor can break it into 2 categories : Category 1 - minimum cash required from the portfolio on an annual basis. Here investments are allocated towards stable yielding business (for e.g GCC based investors invests in local listed businesses having relatively higher and stable dividend yield) Category 2 - liability linked allocation (allocation are directed based on the duration matching of the future liabilities, we mostly use fixed income generating securities like FD, Sukuks, Bonds & consistent and timely dividend generating stocks)

Asset mix in anyone’s portfolio surely provide diversification and is a must, but the mix should not be equally divided, the right mix of assets at right time of horizon can provide maximum returns. For example if one see good returns from equity in near future then weightage of equity related products should be higher and fixed income should be lower, and vice versa. Other point to keep in mind is about liquidity of the products, as your expected and unexpected cash outflows will also play very important role in selecting right assets mix in the portfolio.

Effective Diversification should lower overall Beta of the Portfolio. One way to do that is to introduce Gold in the portfolio. Gold is a good hedge against inflation and it's long term correlation with equities has been low. Owning international funds and equities is another path to diversification.

Sector heavy strategies are for active investors. Investors who will be willing to enter and exit based on the newsflow impacting the sector. Any delay or lethargy on part of the investor can prove to be very detrimental in this asset class.

Sector spread is a good strategy for anyone’s investment portfolio, but one has to keep in mind that if spread is done across all sectors at all time it will not give good returns. Not all sectors will run upward at one point of time neither only one sector will perform out of all, there will be 2-3 sectors which performs good at any point of time and to catch them at right time will give optimum returns to one’s portfolio. So sector spread should be limited to 2-3 sectors at any given point of time and sector run is not very short term so investing in such sectors is not very hard to analyse.

I agree, but investing in international markets is not a cup of tea everybody can have, it’s meant largely for HNI & UHNI category, secondly understanding of international market is also not so easy. Further more diversifying portfolio is good but over-diversification will ruin the portfolio. So it is better to have investment in domestic products until and unless your country’s performance is not expected to perform good in long term.

Investors should consider investing in International Funds and Equities more aggressively. They offer excellent diversification. At the same time, investors do need to keep in mind how the Funds are structured, possible hurdles due to RBI regulations (may lead to severe underperformance) and higher taxes applicable as compared to Indian Equity Funds.

For e.g. the role of Gold cannot be ignored in beating inflation over a long period of time and moreover the last couple of decades specially for non USD investor and more over investors from emerging markets. We have seen several emerging currencies have depreciated against USD significantly since GFC. Gold have yielded pretty good returns in local currency hence cannot be ignored. But when I say Gold I don't mean the physical gold or Gold mutual fund, in India SGBs ( Sovereign Gold Bond) is the best way to get exposure to gold yielding the best possible returns in Gold vs. Etf or Gold Mutual funds and of course physical gold.

I believe Portfolio Diversification also needs to consider the Investment Style. An appropriate mix of growth and value style in accordance with the individual/ institution's unique IPS (asset allocation policy driven by the Investor Policy Statement) needs to be considered. Additionally, Active and Passive Styles need to be considered according to the suitability of the IPS and resources available for allocation.