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Why diversity is good for investments?

Let me start by quoting famous saying "Don't put all your eggs in one basket", Similarly, based on your objectives you may have allocated your investment into various asset classes such as equity, fixed income, insurance, commodities, and P2P lending. But if you do not diversify your investment within each asset class, the exercise, according to experts, is sub-optimal.

Portfolio Diversification
Portfolio diversification concerns with the inclusion of different investment classes with a variety of features. However, the approach could bring benefits to an investor only if the investments included in the portfolio include a small association with each other. A small association indicates that the prices of the investments are not likely to move in one direction.

Many investors are convinced that without an approach to "book profits", they will not do well. Underlying this view is the assumption that the best way to invest is to somehow capture the upside in whatever they hold, while smartly avoiding the downside. Investors believe that they should be able to quit what is not working, and switch to something better, making both decisions correctly each time, so that they can enjoy a good investment return. The better route to good health, nutrition, and good investment habits is to embrace diversity.

An investor should consider diversifying his/her portfolio based on the following specifications:

Types of Investments:

Include different asset classes such as stocks, FDs, mutual funds, P2P Lending, etc.

Risk levels: The portfolio normally should consist of the investments with minimum levels of risk. Investments with divergent levels of risks allow the smoothing of the gains and losses.

Industries: Invest in companies from diverse industries. The stocks of companies operating in diverse industries tend to show a lesser correlation with each other.

Foreign Markets: An investor should not invest only in domestic markets. There is a high chance that the financial products transacted in foreign markets are less correlated with the products transacted in the domestic markets.

P2P Lending: Peer-to-peer lending can give higher returns at relatively lower risk in a falling interest rate scenario. P2P is a quasi-formal system where investor give loans to people not known to him/her so far, in relatively smaller amounts, at high rates of interest, without any pledge of securities.
Investing through a P2P platform like can work well for those who understand the risks involved in it. One should use P2P investments to supplement the fixed monthly income portion of his overall investment portfolio.

Diversification is not about maximizing return. A diversified portfolio manages risk better. To diversify is to accept that investing across assets is a better, sensible, and strategic approach to build wealth.


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