What is Diversification and why is it important
What is Diversification?
Diversification is an investment activity or a strategy to manage the risk.
It basically involves spreading your investment in different types of assets, industries, sectors or companies. Rather than concentrating money in a single company, industry, sector or asset class, investors diversify their investment across different asset classes and industries to minimise the risk.
Diversification reduces the volatility of your portfolio over time and is often considered to be the foundation of several successful investment strategies. Most investment professionals agree that, although it does not guarantee against loss, diversification is the most important component of reaching long-range financial goals while minimizing risk.
In short, diversification is to ensure that “you are not putting all your eggs in one basket. Having eggs in multiple baskets mitigates risk. If the eggs in a basket break, not all eggs are lost.”
For example, if we have a lakh of rupees, diversification is how we invest that lakh of rupees to minimise the risk and gain optimal returns on it.
We first need to understand the time frame of the investment and the risk appetite of the investor. According to your requirement, for the money and the risk you can take, we can diversify the portfolio in different asset classes, and then further diversify in different investments within an asset class.
Different asset classes mean stocks, bonds, Real estate, Gold and others, and hence we can distribute the money in these different assets to minimize our risk. If we further diversify into stocks, we can choose shares, mutual funds or ETFs.
We can further choose among these according to our requirements and risk appetite.
Why is it important to diversify?
We need diversification to minimize investment risk.
Since we do not have perfect knowledge of the future, we cannot simply pick one investment that would perform perfectly for as long as needed. Since the future is highly unpredictable and markets are always changing, we need to diversify our investments among different companies and assets that are not exposed to the same risks.
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What is Diversification and why is it important
What is Diversification?
Diversification is an investment activity or a strategy to manage the risk.
It basically involves spreading your investment in different types of assets, industries, sectors or companies. Rather than concentrating money in a single company, industry, sector or asset class, investors diversify their investment across different asset classes and industries to minimise the risk.
Diversification reduces the volatility of your portfolio over time and is often considered to be the foundation of several successful investment strategies. Most investment professionals agree that, although it does not guarantee against loss, diversification is the most important component of reaching long-range financial goals while minimizing risk.
In short, diversification is to ensure that “you are not putting all your eggs in one basket. Having eggs in multiple baskets mitigates risk. If the eggs in a basket break, not all eggs are lost.”
For example, if we have a lakh of rupees, diversification is how we invest that lakh of rupees to minimise the risk and gain optimal returns on it.
We first need to understand the time frame of the investment and the risk appetite of the investor. According to your requirement, for the money and the risk you can take, we can diversify the portfolio in different asset classes, and then further diversify in different investments within an asset class.
Different asset classes mean stocks, bonds, Real estate, Gold and others, and hence we can distribute the money in these different assets to minimize our risk. If we further diversify into stocks, we can choose shares, mutual funds or ETFs.
We can further choose among these according to our requirements and risk appetite.
Why is it important to diversify?
We need diversification to minimize investment risk.
Since we do not have perfect knowledge of the future, we cannot simply pick one investment that would perform perfectly for as long as needed. Since the future is highly unpredictable and markets are always changing, we need to diversify our investments among different companies and assets that are not exposed to the same risks.
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