Diversification - Why it matters in an Investment Portfolio

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Why Investment Portfolio Diversification Matters?
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Outline of Contents

• What is an Investment?
• What is Portfolio?
• What is Diversification?
• Different Asset Classes
• Brief discussion of Asset Classes
• Advantages of Diversification
• Conclusion

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What is an Investment?

• Investment is the process of using your money to
  buy an asset that you think has a good
  probability of generating at or above market
  returns over time.

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What is Portfolio?

• A Portfolio is a collection of investments held
  by an individual, investment company or a
  financial institution.

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What is Diversification?

• Diversification is the process of allocating
  capital in a way that minimizes the exposure to
  any one particular asset or risk.

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Different Asset Classes

• Some commonly used Asset Classes to Diversify
  Investment Portfolio are-
• Stocks
• Bonds
• Commodities
• Real Estate
• Mutual Funds etc.
  (Continued...)

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Stocks

• These represents shares in publicly held
  companies. If you are interested in long-term
  investment, this is one option for you. You can
  earn good returns if you take risks but you need
  to hold them for a long time.

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Bonds

• Defined as a kind of debt where you are a lender
  instead of a borrower. If you are risk averse,
  then this will be good investment for you but
  these will suffer during inflation.

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Commodities

• These include physical goods such as gold,
  copper, natural gas, electricity etc. Even in
  Inflation, you get good value for these but the
  problem with these is their volatile nature.

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Real Estate

• It is investing your capital in land, buildings
  etc. Real estate investment is considered as one
  of the finest investment options from centuries.
  It is the best in providing a long term financial
  security. Despite its benefits, it also face
  market liquidity risks.

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Mutual Funds

• It is Pool of Savings for multiple investors.
  Called as Mutual funds because all the risks
  returns were shared based on the proportion of
  investments. This provide you good
  diversification but it has market interest rate
  risks

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Advantages of Diversification

• Reduces Risk For example, If you invest in only
  one of the asset classes and it performed poorly,
  you endup in losses. But if you place your
  investment in different asset classes, if one
  performs poor the other may perform better and
  balance your loss
• Capital Preservation Capital appreciation is
  important but capital preservation is also
  equally important. Investing in different asset
  classes helps you in preserving your capital
• Better Returns Diversification helps you in risk
  adjusted returns

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Conclusion

• Note that, an investment portfolio should be
  constructed in such a way that it should meet the
  financial needs and goals of an individual. There
  is no need to invest in every asset class. But,
  before investing in something, have a clear
  picture of it and then allocate your investments
  accordingly.
• Wide diversification is only required when
  investors do not understand what they are doing
  - Warren Buffett

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Thank You!