Wealth Guide: Why portfolio diversification is important and how to make money out of almost anything

Wealth Guide: The world is full of interesting assets and money can be made in a multitude of ways. Diversification is purchasing a variety of equities, and asset allocation is vastly undervalued. Diversifying your investments entails investing in a variety of asset classes, such as direct equities, mutual funds, debt funds, fixed deposits, real estate, precious metals such as gold and silver. Ashis Sarangi, SEBI Registered Investment Advisor at Pickright Technologies, shares his knowledge on need for portfolio diversification and decodes why investing in one asset class is not a wise choice:-

"There is this myth that you need to choose one asset class to invest in and stick to it. But the truth is, if you are smart and adventurous enough, you can make money out of almost anything. Suppose you like to invest long-term in gold, and silver, but you would also like to make money in stocks. You can buy a global stock portfolio and also buy gold, silver, and other precious metals to hedge against the risk of the stock market. Although it is not easy to decide when to switch from one to another, it is possible. Indeed, most investors nowadays wish to make money only from stocks or real estate," says Ashis Sarangi.

Sarangi adds, "The benefits of diversifying your investment portfolio hold only if the underlying investments in a portfolio are not correlated—that is, they respond differently, often in opposing ways, to market influences.

Suggesting Benefits Of Diversification, he lists:-

• Reduces the effect of market volatility
• Assists in multi-asset investing.
• Help in achieving long-term financial goals
• Helps in compounding interest
• Help in keeping you recession free

He further added, "One must allocate across multiple asset classes in one's portfolio for risk diversification. Each asset class follows different economic cycles. For example, interest rates and gold often do opposite things which can result in making or losing money. In a bear market of bonds, stocks often do well. On the other hand, in a bull market for stocks, bonds often do poorly. By having different asset classes, your portfolio will do well even if some of those assets do poorly."

"An emergency fund is completely ignored by investors today.  It is highly important to cash at the time of emergency, It is important to have an emergency corpus. If you don't have one, you should build it immediately. The purpose is to provide money when you lose your job, get sick, car accident, home fire, or have any other unexpected event you need money. An emergency fund is different from the money you use every day. You want to keep most of your emergency fund in a safe place, where the risk on capital is low and it can use by you anytime savings account or liquid funds etc.," he advised.

"When Investing in stocks, studies, and mathematical models, the best cost-effectiveness & risk reduction are achieved by maintaining a well-diversified portfolio of 20 to 30 companies. Investing in more assets provides more diversification benefits reduces risk. Portfolio diversification is the most basic and effective way of reducing investment risk. A well-diversified portfolio contains a mix of stocks from different sectors and market cap, Diversification is a strategy to minimize risk. For instance, instead of putting all of your money into a single technology stock, you invest in several tech stocks, a variety of stocks from different sectors. This way, if the market sours on the particular sector you invested in, you will still have some money in the stock market so you don't end up entirely broke. Diversification attempts to smooth out unsystematic risk events (non-market wide events) in a portfolio, i.e. sizable gains will help offset losses in other stocks," he concluded.

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)