The Hindu Business Line : Not all in one basket

The booming stock market has thoroughly convinced Nirmal that equities are the best bet. Every month, over the past three years, he and his wife have been ploughing Rs 20,000 into systematic investment plans in equity funds. Simply thrilled with his burgeoning balance, he questions the need for any other investment, when stocks alone can work such miracles!

Though having a high allocation to stocks is a good idea in the initial years of your career, ignoring other forms of investment can expose you to outsized risks. No asset class, whether stocks, bonds or real-estate, can keep delivering stupendous returns year after year. Most investments have their cycles of exceptional performance and slumps. If the stock market tumbles, Nirmal may find that his nest-egg has suddenly shrunk sharply, forcing him to postpone buying that flat or car he fancies. For much the same reasons, it is not a good idea to invest all your surplus savings in a single piece of property, as most of us tend to do.

Why diversify

Diversification, or spreading your investments across different forms of investments, is one of the cardinal rules of investing. As an investor, you have to make sure that your portfolio includes different kinds of assets (say, stocks, bonds, property and gold) and have an even balance between them. To have a truly diversified portfolio, you need to try and include in it, assets that are not highly correlated to each other. For instance, if you are looking to diversify a portfolio of stocks, precious metals, bonds or even fixed deposits may be a good addition because of their tendency to perform well when stocks don't.

Diversify within

Once you have decided to pack your portfolio with different kinds of investments, it is also necessary to diversify within each asset class. If you plan to buy plots of land, spreading your investment across two or three sites in different localities or cities may help insulate your savings from gyrations in property prices in one particular locality. Similarly, holding different types of equity funds (mid-cap, large-cap, diversified) may help you build a portfolio that is not too reliant on a particular sector or segment of the market.

Putting all your eggs in one basket is risky; but putting them in so many baskets that you can't find them, is also not a good idea! Periodic monitoring of your investments and re-balancing of investments between various asset classes is necessary to your financial health. Hence, while diversifying your portfolio, it is also necessary to keep the number of your investments at a manageable level . For a small-sized portfolio, holding about a dozen stocks and four-five equity funds, apart from some investments in real estate and gold, may deliver adequate diversification.

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