DIVERSIFY – sounds technical, boring and rather not worth our time. But believe it or not, we all indulge in some form of diversification in our daily lives. Think about it; do you eat just one dish every day for breakfast, lunch and dinner? Not only do you diversify across your meals but also within each meal you are likely to eat 2-3 or more different types of dishes. At breakfast, you may eat a fruit, eggs, cereal, or idlis and a beverage. The range of food we eat is also a form of diversification.

Why do we do it? Diversifying our food helps not only in maintaining a good balance of nutrients that we consume but it also helps entertain our taste buds!

Then there is the diversification in our clothes; appropriate clothing in different weather conditions helps in the style factor. Diversification in music to keep our aural senses engaged and entertained. Believe it or not, many of us will diversify our friends too! The 2 am friend, the samosa sharing friend, the shopping buddy and the infuriating emotional fool!

What is the fuss really about?

Essentially what diversification does is – de-risk our lives. If you only have denim in your wardrobe, you’ll risk being laughed at at your best friend’s wedding reception; if you only eat bread for all three meals, you’re likely to risk your health.

Similarly, if you only hold one asset or one type of investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... More product, you will risk either suboptimal or low returns on the one hand or capital loss on the other. This is why it’s important to diversify and have a balanced investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... More portfolio. It allows you to earn an efficient return for the risk you are willing to take.

Having only denim in your wardrobe is too risky, but you may not invest in buying new sarees if you don’t wear them often. Instead of wearing a traditional embroidered salwar suit (which you already own) for that wedding reception is a risk worth taking, rather than spending on collecting sarees which will remain untouched for many months.

This is exactly how diversification in investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... More works. You may not want a file full of fixed deposits because, at the end of 5 years, you haven’t beaten inflationInflation is a common term thrown around in economics lessons and by politicians around election time. What it means in simple language is that prices of things you buy, stuff, keeps increasing every year. It happens because the economy in... More with the returns you earn. You really aren’t growing your money. Neither do you want to put all your savings into equity markets, because then if an emergency expense comes up within 6 months and the markets are down, you’ll be left with no choice but to book losses.

It’s not just in investments but in life that diversification will help! Watch this…

Perfect diversification and asset allocationAsset allocation is essentially an official term for what you intuitively know is a healthy investment practice. For starters most households are likely to own some property and gold. That is diversification in asset allocation. You allocate the money you... More

There is no such metric as perfect diversification when it comes to individual portfolios. How many bananas a day are good for you? If you are an athlete, maybe 3, for a senior citizen who is mostly home-bound – one may be enough, for someone on a special diet – it may be bananas the whole day! The right answer really lies in an individual’s own financial needs.

Here is a simple example; if you are in your early 30s, newly married or unmarried even and don’t have too many responsibilities, you live on rent, parents are financially comfortable and you have a secure job, you can easily keep aside a higher allocation towards long term wealth creation through assets like equity. On the other hand, if you are in your late 30s, with school-going children, dependent parents with medical expenses and living in a house bought on a loan, you will not be able to allocate a very high amount to equities, rather you will have to balance it with stable return, low risk and liquid assets like money market and hybrid funds.

Secondly, even before you begin active investing, you may have products which fit into some part of your asset allocationAsset allocation is essentially an official term for what you intuitively know is a healthy investment practice. For starters most households are likely to own some property and gold. That is diversification in asset allocation. You allocate the money you... More. There may be some gold, provident fund contributions or even some shares transferred in your name by parents or other family members and of course ancestral property in your name. Always account for these before making your investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... More portfolio. If you have a lot saved up thanks to deposits your parents made in your name or EPF contributions, then there is a case to allocate more to growth assetsGrowth assets as against fixed return assets are those which grow your capital or principle investment. The most common forms of growth assets are equity stocks and property. Investing in equity stocks means you buy a portion of the underlying... More like equity. If you already own property, whether your house or otherwise, then don’t invest too much more into it. The biggest drawback of real estate is that it’s not easy to sell, especially if you need money in an emergency. You may be able to sell it in a hurry, but then you will have to settle for a lower price.

Diversifying across assets ensures that you have invested where you can get stable returns with higher capital protection for times when you need emergency money, along with what you have invested adequately in growth assetsGrowth assets as against fixed return assets are those which grow your capital or principle investment. The most common forms of growth assets are equity stocks and property. Investing in equity stocks means you buy a portion of the underlying... More which help you grow money through capital appreciation and lastly, you have a combination of liquid and flexible financial products which give you access when you need.

Levels of diversification

It’s a good thing that I have a mix of Indian and western wear in my wardrobe, it aids my choices for different events and occasions. Within Indian wear, I have a combination of sarees and salwar kameez, which also helps, within western wear (as the video shows) I have more than one type of jacket – again for different occasions.

In investing too, diversification first happens at the asset level, then in products within an asset (different equity funds, different deposits and so on), then within funds diversify the asset manager and fund manager to include more than one style.

Caveat

Don’t over diversify. It’s easier said than done. But what it means is that you mustn’t add more products simply for the sake of diversification and neither should you add a different product each time you invest. How much is enough? That will depend on your portfolio and the fund selection. Ideally, once you understand the asset allocationAsset allocation is essentially an official term for what you intuitively know is a healthy investment practice. For starters most households are likely to own some property and gold. That is diversification in asset allocation. You allocate the money you... More you need to have, select only as many funds in each asset class as will help you get a unique exposure. For example, if you want to build equity allocation, pick funds with different fund managers and styles, rather than two funds managed by the same fund manager. Check for overlaps in securities and in sectors; a similar approach is needed for fixed income funds.

I always say, if this sounds like too much Greek, get a financial planner or advisor to help you. There are several of those online and offline that you can use.

Remember, none of us has only white shirts/tops/kurtas in our wardrobe, neither do we eat dal rice, every day for every meal, if diversification is essential for all elements of our daily lives, then its also crucial to implement in our investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... More strategy!!

Happy investing! Leave your comments and let us know what you think about this blog!