Why diversification is important in investments

Never put all your eggs in one basket is a proverb that we have all heard and often apply when it comes to investing.  However, when people consider investing, they often believe it to include dividing up available assets among a few different ventures and possibly keeping a track of results over time. Investment is a multi-dimensional process with several elements. However, investment diversification is one of the most significant aspects to pay attention to if someone wants to succeed at investing. Below mentioned are the reasons why an investor should diversify his investments.

 

Protection against risks

Investing money come with varying degree of risk. In order to beat inflation it is very important to invest in different asset classes. We must diversify our portfolios to protect ourselves from the resulting investment dangers. By doing so, we can hedge against market volatility by distributing the funds that are available for investment among a variety of assets, including stocks, bonds, gold, real estate, and bank deposits. For instance, we can rely on gold and real estate investments to balance off the overall risk of loss if the stock market is underperforming.

 

Exposure to a variety of sectors

We must invest wisely across sectors when we diversify our portfolios. Furthermore, it might be challenging to differentiate between a sector that might perform well in the future and offer high returns versus the one that might provide low returns. When the Covid-19 pandemic first broke out, the pharmaceutical industry had a significant rally. Therefore an investor who would have invested in pharma stocks would have made substantial profits. On the other hand there was a slump in the real estate market, which reduced returns.

 

Improved and consistent portfolio returns

The stock market, real estate, and other investment sectors are among the most volatile. Therefore, concentrating only on stock or real estate investments may not provide consistent returns over the long term. In order to achieve balance and stability in investment returns, investors should diversify their portfolios by purchasing gold, debt instruments, and bank fixed deposits in addition to stocks and real estate.

 

Higher liquidity

Majority of the people often allocate their money to safer investment options like bank fixed deposits or NPS or PPF.  The lock-in periods for these investments vary, despite the fact that they provide high levels of capital safety. Though investors may not have the liquidity in case of an emergency. By diversifying the asset classes in their portfolio, an investor can make both secure long-term investments and some extremely liquid investments. With that approach, one can liquidate an investment without paying a penalty when they need it the most.

 

Conclusion- One of the most frequently asked investment-related queries is how to manage risk, and the one-stop solution is portfolio diversification. It enables an investor to feel more at ease about the overall risk of their investments. Therefore if some of the investments aren't doing well, one can still be confident in getting some profits from other investment classes which is the topmost advantage of investment diversification.