Have you ever LUDO in your childhood?
If yes, then you would know that you should never rely on only 1 token to help you win. That’s because if you have opened only 1 token, then the chances of the opponent capturing that taken are at an all-time high. However, if all four of your tokens are open, then even if the opponent harms your 1 token, you have another to fill in for that loss.
Investment is like playing LUDO but in real life. In real life, you will have an investment portfolio and a choice to allocate your funds to different stocks, SIPs, ventures, and industries. This diversification in investing will help you in case some industries get hit or some funds collapse in value due to market volatility.
If you are new to the concept of investment diversification, then let’s start with a definition. Secondly, you can even diversify your investments with the help of a personal loan in Bangalore.
Diversification in Investing
When you start investing, you will choose some funds or assets that offer the best returns. Now, instead of investing in just 1 outstanding fund, if you choose to invest small amounts in different asset classes that have no relation to each other, then this is called diversification.
A diversified portfolio will have 10–20 different stocks across different industries and geographical regions. For example, you invest in 2 stocks simultaneously; one is airline stocks and the other is railway stocks. Now, when aircraft pilots sit on strike and refuse to fly plains, you will face a loss in airline stocks. However, your railway stocks will become more valuable as more people shift to rail travel.
Diversify across industries
In the above-mentioned example, we suppose that you invested in 2 different stocks in the same industry, i.e., transportation. What if you started investing in different industries? For example, in some stocks of airlines and railways, you should invest in gold, oil, and petroleum.
Why? It’s because if and when war-like situations emerge in a nation, the government will impose a ban on transportation. So, all of your investment in the transportation sector will decrease in value. However, the requirement of oil, gold, and petroleum is eternal. So, the value of stocks in this industry will increase.
Through this example, you must have observed that diversification is important for risk management.
Diversify across companies
If you are a working professional, then you must know that sometimes companies suffer a huge loss due to bad team management. For example, in comparison to Blinkit, Zepto has very poor delivery timing. That’s why customers shifted to Blinkit in 3-4 months, and Zepto had to incur a great loss.
Now, even though both companies were operating on the same idea, poor supply chain management and a lack of problem-solving have left them with no choice but to offer cashback to retain customers.
If you are planning to invest in the stocks of just 1 company, then there is a very high risk of loss. However, if you plan to diversify your investment across different companies, then there are chances that you will get better returns from either of the two companies.
Diversify your investment in geographical regions
Let’s suppose you invested in stocks in all India-based companies and asset classes. However, when there is a financial emergency or warlike situation in India, then the value of your stocks will immediately decline. To avoid situations like these, you need to invest in companies based in different geographical locations.
Conclusion
“Never put all your eggs in one basket.”
An intelligent investor never invests in just 1 kind of stock, industry, or company. He/she makes sure to diversify and allocate his funds to different funds. So, you must plan to diversify your investment across different regions, companies, industries, timeframes, etc.
