Pillars of Diversification

Diversification plays a key role in portfolio management. Diversification mixes a wide variety of investments within a portfolio. Some of the advantages that diversification provides are:

• Includes distinct asset type
• Limiting exposure to any single asset class
• Create well-balanced portfolio
• Yield better long term returns
• Lower risk of individual security/industry/company
• Risk management strategy - mitigate unsystematic risk
• Choose to have negatively correlated assets in your portfolio
• Hedge against market volatility

There are following various pillars of diversification, which need to be taken into account while making any investment portfolio.

• Asset Class Base: (across asset class)
• Equity
• Debt
• Real Estate
• Commodity
• Liquid/Cash
• Art & collectibles

• Type Base: (within asset class)
• Equity -
• Market cap wise - largecap, midcap, smallcap, multicap,
• Sector wise - auto, cement, pharma, IT, bank, finance, power, metal, consumables, real estate, oil & gas, commodity, media, etc.
• Theme wise - Infrastructure, special situation, dividend yield, value fund
• ETF, Index, FOF
• Children fund, retirement fund
• Private equity
• Debt - 
• short duration, medium duration, long duration, Gilt, Corporate bonds
• Small savings schemes
• Hybrid - Balanced, Asset allocator funds 
• Real Estate - 
• residential, commercial, agricultural
• MF REIT
• Commodity - 
• Bullion: Gold, Silver
• Metal - Non-metal
• Liquid - 
• Bank
• Liquid MF

• Return Base:
• Guaranteed/fixed return instruments - FD, PO, PPF, Small Savings Schemes, Bonds & NCD, Insurance Annuity
• Market link return instruments - MF, Equity, NPS, ULIP

• Geographical Base:
• Domestic market
• Foreign or International market - emerging market, developed market

• Time Base:
• Lumpsum - onetime
• SIP - fixed, step up
• STP - fixed, value base, flexible    

• Vehicle Base:
• Direct, MF, NPS, Insurance
• Mode - Online or Offline, and Demat or without Demat

It is very important to have the right mix of asset allocation & diversification as per your risk appetite, life stage, financial goals, etc.

Disclaimer: Investment in securities & mutual funds are subject to Market Risk