We tend to use the terms asset allocation & diversification interchangeably. However, they are principally different strategies. Asset allocation is the process of determining the right mix of investments you should own i.e. exposure to various asset classes. On the other hand, diversification is what you invest in within these asset classes.
Once Asset Allocation is finalized i.e. how much percentage of amount is required to be invested in a particular asset class like equity, debt, gold, real estate, cash, and insurance, the next step is to further diversified within that asset class.
- Equity:
- direct equity
- mutual fund
- domestic equity & international equity fund
- large-cap, mid-cap, small-cap, multi-cap fund
- hybrid, multi-asset, asset allocator fund
- ULIP
- NPS
- Debt:
- short duration, medium duration, long duration, dynamic bond fund, floater fund
- credit risk fund, corporate bond fund, PSU bond fund
- govt. securities
- small saving schemes - PPF, NPS, SCSS, POMIS
- EPF
- FD
- Real Estate:
- commercial
- residence
- agriculture
- REIT based fund
- Precious Metal:
- gold
- silver
- diamond
- Insurance:
- life
- health
- personal accidental
- critical illness
- Cash:
- saving account
- liquid mutual
Proper diversification helps to reduce the non-systematic risk of your investment portfolio by allocating your finance to different asset class categories and ensuring optimizing the returns.
Advantage of Diversification:
- Reduces the impact of market volatility
- Help to create a balanced portfolio
- the underperformance of one scheme can be taken care of by another performing scheme
- Enhance Risk-Adjusted Returns
- Helps seek advantage of different investment instruments
- Offers peace of mind
Diversification does not guarantee a profit or protections against loss, however in simple words: Don’t put all your eggs in one basket!
Disclaimer: Investment in securities & mutual funds are subject to Market Risk
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