DIVERSIFICATION OF INVESTMENT

DIVERSIFICATION OF INVESTMENT : MEANING

Diversification is the proper allocation of fund among the various available opportunities in the market as per risk taking capacity depending on age of the investor and several other practical factors.Though some investment will carry less return but risk involvement would be negligible while in other cases return may increase with increase in risk factor.

Importance of diversification.

Diversification helps you protect your investments from market fluctuations. Diversifying means allocating your money to different investments avenues and shields you from price risks. As you pick the best stocks from the hottest sectors, the fluctuation risk of the stock eroding your investment rises correspondingly. Since some stocks in the IT and media sectors are highly volatile, you need to protect your portfolio by investing in some defensive stocks or other industry groups. It would also be wise to diversify your investments into bonds or FDs as these are low risk - fixed income avenues.

The primary objectives of any Portfolio management are

Security of principal amount invested

Stability of income

Capital growth

Liquidity – nearness to money to take up any new buy opportunities thrown open by the market

Diversification

Diversifying means buying stocks belonging to different industries with very low correlation i.e to find securities that do not have tendencies to increase or decrease in price at the same time.

What you're working towards should be at least five industries for the stock portion of the portfolio with each stock being the best stock, in your opinion, in their respective industry group. There should still be money invested in a money market fund (the equivalent of cash) as well as some in fixed income.

On the flip side, a diversified portfolio is unlikely to outperform the market by a big margin for exactly the same reason.

Portfolio – Age relationship.

Your age will help you determine what is a good mix / portfolio is

Age	Portfolio
below 30	80% in stocks or mutual funds 10% in cash 10% in fixed income
30 t0 40	70% in stocks or mutual funds 10% in cash 20% in fixed income
40 to 50	60% in stocks or mutual funds 10% in cash 30% in fixed income
50 to 60	50% in stocks or mutual funds 10% in cash 40% in fixed income
above 60	40% in stocks or mutual funds 10% in cash 50% in fixed income

These aren't hard and fast allocations, just guidelines to get you thinking about how your portfolio should look. Your risk profile will give you more equities or more fixed income depending on your aggressive or conservative bias. However, it's important to always have some equities in your portfolio (or equity funds) no matter what your age. If inflation roars back, this will be the portion of your investments that protects you from the damage, not your fixed income.

Also, the fixed income of your portfolio should be diversified. If you buy bonds and debentures directly or if you invest in FDs, then make sure you have at least five different maturities to spread out the interest rate risk.

Diversifying in equities and bonds means more than buying a number of positions. Each position needs to be scrutinized as to how it fits into the stocks or bonds that already are in your portfolio, and how they might be affected by the same event such as higher interest rates, lower fuel prices, etc. Put your portfolio together like a puzzle, adding a piece at a time, each one a little different from the other but achieving a uniform whole once the portfolio is complete.