Importance Of Portfolio Diversification

Diversification in its simplest meaning implies investing in stocks or asset classes that do not move in tandem. Armaan Madhani breaks down the process of diversification which can help investors mitigate portfolio risk by having exposure to a variety of different stocks, and not put all their eggs in one basket

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Investors come in different shapes and sizes. They have different investment horizons and risk appetites that determine their investment decisions. They are broadly categorised into conservative, moderate and aggressive. Some investors keep adjusting their risk appetite depending on the prevailing market condition. When the market falls precipitously, the way it did in the first quarter of FY23, these investors become aggressive.

Nonetheless, when the market is trading at a lofty valuation, they become conservative. These types of investors are ‘opportunists’. There is nothing wrong with such investors.

However, identifying the top and bottom of the market is extremely difficult and even the most seasoned investors cannot vouch for it on a consistent basis. Hence, one of the best strategies is to invest in a diversified portfolio. Diversification is the key to reducing investment risk.

Defining Diversification Diversification in its simplest meaning implies investing in stocks or asset classes that do not move in tandem. Through the process of diversification you mitigate the portfolio risk by having exposure to a variety of different assets or stocks, which means not putting all your eggs in one basket, as the old cliché goes. The main purpose of diversification is to lessen the overall volatility of your investments. Where one may go bad, others go well, which means helping to even out the performance over the long term. In the current market situation, it's a good time to diversify your portfolio.