Diversification is one of the most loosely used words. Many people have different theories about the term. We need to understand the term in different contexts.
Diversification could be taken as a tool to manage risk. As in any investment we are exposed to an unknown future that may be internal to a company, Industry, Region, Promoters and so forth. Based on the principle – “Anything could go wrong at any point of time.”
On the other hand, it might restrict one’s return as capital is spread across, rather than putting all in an investment. So, you need to play game wisely by controlling ‘Emotions’.
I would like to put the following contexts that might help you to understand, and make an informed decision.
1) Investment:
You can diversify your investment if you are not comfortable in a single asset class. Major Investment options – Listed Equity, Unlisted Equity, Startup funding, Bank Fixed Deposit (FD), Corporate FD, Post office saving schemes, Government saving schemes, Real-estate, Gold (only to protect against US Dollar.), Mutual Funds, Infrastructure Investment Trusts (InvITs), Global/Countries and so forth.
2) Equity Investment:
a. Invest in top market leaders in the respective Industry segment.
b. Top 2-3 companies (or 5, your option) in a specific Industry that you understand.
c. Good companies in various Industry segments.
d. Allocating the same fixed percentage of capital to each identified company (say 5% of total capital to each company)
e. Investing based on Promoters Government owned Vs. Other
f. Allocating capital in Mature businesses (stable, incremental growing and dividend-paying), growth-oriented (start-up-like, expecting someday would become profitable and grow), and event-based companies (merger, demerger, expansions, new revenue stream). [Note: Many more themes could be possible here.]
3) Mutual Fund:
a. Investment in multiple MFs schemes offered by a Asset Management Company (AMC).
b. Multiple MFs offered by good AMCs
c. Theme-based MF schemes
4) Saving:
Important Question: Are you saving to park funds for emergencies, or as an Investment management tool (Capital base)?
Based on your answer, the diversification option could vary again.
a. Various Saving schemes from the Government, Post Office, Banks, Corporates, InvIT
b. MF debt schemes
In conclusion, I would like to submit that diversification majorly depends on your personality type, comfort in options, timeframe, goals and aspirations to manage risk and return. You can use single or multiple options based on ‘You’.
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