Why you MUST diversify your investments

Avoid losing your money and make the most of your investments. Read on to know more.

We make investments to secure our future and with basic aim of maximization of wealth. A potential investor always plans their investments and analyses investing strategies to make maximum out of their investment.

There is a risk return trade off that is faced by an investor and that is why investment in a right instrument becomes pivotal to an investor. Putting money in just one instrument can expose your investment as it is a risky decision.

You can lose all your money if your investment is not able to reap benefits out of your investment. Thus, to limit this risk, an important principle of investment is to diversify your portfolio of investment.

In this climate of economic uncertainty, generating expected returns from your portfolio of investment can be a very hefty task and in such a scenario, an investor has to remain proactive with their investment strategies in order to match expectations.

With high market volatility and changing government policies can hamper an investment decision certainly. Investment is generally done keeping another basic principle of investment in mind which is higher the risk, higher the returns and lower the risk lower the potential returns.

So, investment must be done keeping this trade of risk and return in mind, and as an investor you must think and analyse how much risk are you prepared to take.

There are lots of investment avenues or instruments available for the investors like equity, bullion, real estate etc with each having their own levels of risk and variability in returns. There are other government instruments available like national savings certificate, recurring deposits or time deposits which are safer in nature with no risk at all but with lower returns.

If you are losing opportunity to get better returns as per your risk ability, it does not make sense investing in lower risk investments. That is where diversification principle works well in your favour and helps generating more returns.

Read on to find out some of the other factors why diversification is must

Illutration: Uttam Ghosh

An investor invests and parks their funds in order to get returns with long term objective of wealth maximisation.

Stability in returns can only be ensured if you have a diversified portfolio i.e. investment in different asset classes. An individual must have a balanced portfolio with investment in risky and non-risky assets.

You can invest in equity markets according to your risk ability and rest in government securities which can derive fixed returns resulting in stability in returns.

Illutration: Uttam Ghosh

There are two types of risk to an investment. Financial planners emphasize to limit impact of these risks. Systematic risk is the first kind of instrument which cannot be reduced as it is due to change in macro-economic factors such as inflation, government policies or change in interest rates and are market driven. Other form of risk is unsystematic which can be reduced by diversifying investment portfolio. This can mostly be related to business and financial risks. If you have exposure to different asset classes, you can eliminate potential business risk.

Illutration: Uttam Ghosh

With diversification in your investment portfolio and limiting your potential risks help meet you fulfilling long term objectives. As money is allowed to grow generating more than steady returns as well helps in wealth maximisation leading to meet this objective.

Illutration: Uttam Ghosh

With greater uncertainties and volatility across financial markets and different asset classes, investment in one asset or security can prove dangerous. It can lead to collapse of whole investment portfolio but diversification can help lowering down impact of any collapse. It protects your portfolio from breakdown when one market or asset sector is in doldrums.

Illutration: Uttam Ghosh

As you limit your risk accompanied by higher returns from your investment helps you building a retirement corpus. Gathering and building a large retirement fund is one of the primary objective of investment for an individual but parking funds in single and wrong instruments can hamper this goal. But diversification allows you stable returns and building retirement corpus helping you to maintain higher standard even after your work life span when you are not earning money.

Your investment goals, tolerance for risk, and investment time horizon will basically regulate how you diversify your selection of asset classes. But on a very elementary asset-allocation level, your portfolio might include a percentage in stocks or stock mutual funds, treasury bills or other secured form of government securities.

Illutration: Uttam Ghosh