How to Diversify Your Investment Portfolio with Recurring Deposits

Remember how our parents used to tell us to keep our investments diversified to ensure all is not lost when there’s market downturn? They were right. While it’s true that equity investments have the potential to offer higher returns, there’s also considerable risk. To mitigate risks, it’s important you balance your portfolio through fixed instruments like Recurring Deposits (RDs) and Fixed Deposits (FDs). 

In this blog, we have decoded how Recurring Deposits can help you diversify your portfolio.

What is Diversification?

Never put all eggs in one basket – if the basket slips and falls, all the eggs will break. Instead, divide the eggs in multiple baskets to minimise or mitigate loss/damage. This is what diversification is. It is a strategy that involves spreading your investments across various asset classes to reduce risk. By investing in different types of assets, such as stocks, bonds, real estate, recurring deposits, and commodities, you can protect your portfolio from the volatility of any single investment. The primary goal of diversified investment is to achieve a balance between risk and return.

Benefits of Portfolio Diversification

Diversifying your investment portfolio offers several benefits:

• Risk reduction: When you diversify your investments, you spread the risk across different assets. If one investment underperforms or experiences a downturn, other investments may offset the losses.
• Potential for higher returns: By allocating your funds across different asset classes, you increase the likelihood of earning higher overall returns. This is because other asset classes perform differently in various market conditions.
• Smoother portfolio performance: Diversification makes your portfolio less susceptible to extreme ups and downs in the market. It helps smooth out volatility and provides stability during turbulent times.

Now that we understand the importance of diversification, let's see how we can diversify portfolio through recurring deposits.

How Recurring Deposits Can Help Diversify Your Portfolio?

Recurring deposits are a financial product banks offer that allows you to regularly invest a fixed amount over a specific period. These deposits provide a stable and predictable return, making them an ideal option for diversifying your investment portfolio. Here are a few reasons why recurring deposits should be considered:

1. Low Risk

Recurring deposits are considered safe savings because they offer a fixed rate of return over a predetermined period. Unlike market-linked investments, such as stocks or mutual funds, the returns from recurring deposits are not subject to market fluctuations. This stability helps reduce the overall risk in your investment portfolio.

2. Regular Income Generation

By investing in recurring deposits, you can generate a regular income stream. The interest earned on these deposits, about 8.25% annually, can be reinvested or used to meet your financial goals and expenses. This regular income through diversified investment complements your other investments and stabilises your overall portfolio.

3. Flexible Investment Tenure

Recurring deposits offer flexibility in terms of investment tenure, which is 6 months to 10 years, allowing you to choose a duration that aligns with your financial goals. You can opt for short-term deposits for immediate liquidity requirements or long-term deposits for higher returns. This flexibility ensures that your investment portfolio is well-aligned with your individual financial needs.

4. Easy Accessibility

Unlike certain investment options that may have lock-in periods or complex withdrawal procedures, recurring deposits provide easy accessibility to your funds. In case of any urgent financial requirement, you can withdraw your funds partially or prematurely without any significant penalties.

Is Recurring Deposit the Right Investment Option for You?

While recurring deposits are a safe investment option, they may not suit everyone. An RD could be a prudent choice if you have short-term financial goals and prefer guaranteed returns with minimal risk. However, if you have long-term financial objectives, solely relying on recurring deposits may not provide optimal returns.

It is essential to diversify your investment portfolio through recurring deposits to achieve long-term financial growth and mitigate risk. Consider alternatives such as liquid funds, fixed deposits, and carefully selected equity mutual fund Systematic Investment Plans (SIPs). These options have the potential to generate attractive returns while offering professional management and enhanced liquidity. Diversification is critical to maximising your investment potential.