Diversification - A word you would have heard countless times.
Let us explain this to you in very simple words – You know when you have lunch, you have a few chapatis, sabzi (vegetable) , Dal, Pickle, Salad, Rice and sometimes a sweet after it.
Let us explain this to you in very simple words – You know when you have lunch, you have a few chapatis, sabzi (vegetable) , Dal, Pickle, Salad, Rice and sometimes a sweet after it.
Now your lunch and diversification are just the same! Why? Because just like you have a set amount of each food item in your lunch meal, diversification also propagates the exact same division of your money in several assets.
Suppose you have Rs 100, so you invest Rs 60 in Blue Chip Equity Stocks (In lunch it is Dal which you have 1-2 bowls of), then you invest Rs 15 in Small sized equity stocks (Pickle which you only take for taste, because you know if you eat a lot of it, you may have some problems)
Same goes for small cap equity stocks, they are high risk high beta, so only a very small portion is allocated here, then you invest Rs 15 in Mutual Funds (this is your Sabzi/Vegetable which you have with roti for good taste.) for stability/low risk/low volatility to the
portfolio and then finally Rs 10 you allocate to commodities such as Gold (in Lunch you have rice, but then again you have very limited quantity as it can make you lazy and you only have it when you are still hungry) when the commodity cycle is in your favour.
Just like Lunch which is balanced with several food items, a portfolio of diversified assets is supposed to return you a set amount of returns with a level of risk the portfolio owner agrees/ is comfortable to take up.
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