It’s Significance – The right way to invest is diversification
“The stock markets have crashed.” “Interest rates on fixed deposits and savings account have fallen”. “Gold prices have risen”. “Real Estates market is on the upbeat.” You must have come across with such phrases in your life. Actually the investment market is never stable. That’s why there is risk involved in investment. At any point of time one cannot be certain and sure about the returns on our investments. The return margins can be thin or they may be thick. You may also face loses on your invested sum of money. As such Diversifying your investment portfolio becomes of utmost importance to you. What is Investment Diversification and how can you benefit from it will be the centre of discussion in the present post.
What is Investment Diversification?
In simple terms, Diversification of Investment means that you do not put your money in only one of the investment options. On the contrary, whatever amount of investment you do, you make it through different options available for investment. For example, if you have 1000 Dollars for investment, you decide to put part of your money in bank saving account, some part of money as fixed deposit, some part invest in stock market, with some you buy insurance and with other you buy bonds and securities and rest with of the fund you purchase gold. This above scenario presents you an example of how you can go about diversifying your investment portfolio. Thus investment diversification gives you the control over the risk of investment. You can minimize your loses on one hand in times of unfavorable economics and on the other you can optimize your rate of return in times when the economy is in boom.
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How it is beneficial?
The benefits of diversification are varied. We will illustrate this by taking different examples. Suppose, let us take an example of a person who has put all his money in bank saving account. Now the main disadvantage of this type of investment is that the person is losing out on the rate of return advantage. A saving account usually gives an interest of two to six percent or in many countries about no return. Though this type of investment is low of risk but the interest earned by the investor here even fails to keep up with the rate of inflation. So actually there is no growth in the value of the money invested. The same person will benefit if he decides to diversify his portfolio of investment.
Let us suppose he now builds up on his portfolio to include fixed deposits, investment in stock market, buy out some bonds, take an insurance cover and purchase out some gold. This will now diversify his investment. With diversification he has now secured his life from any financial risk by taking an insurance cover. He has also invested in stock market where he has a chance to gain a good return if the market flourishes or else if the market falls then only a part of his money is in risk. Also he has put some of his money as fixed deposit and thus increased the rate of return with the money kept in the bank. And also he had bought some gold. This gives him the security in case if the stock market drops. The gold acts as leverage in times of need as well with its easy liquidity. The value of gold is always maintained and shows a healthy increase with time.
Let us take another example. Suppose a person has invested all his savings in stock market. Here the person is taking a very high risk. If the stock market shows a downward trend and crashes, the person will lose all his money. He has to bear heavy losses. Instead, if the person diversifies to include an insurance cover, investment in real estate, buy some gold and gold related stocks, keeps some money in bank as savings and as fixed deposit he will manage the risk of investment in a better way. Thereby he will ensure a good return on his investment, protection for himself and family and take a calculated risk of the fluctuating markets, while always maintaining a healthy liquidity in the form of savings and gold.
Conclusion- Diversification Is the Answer for a Wise and Smart Investment
Thus as have discussed above, the importance and advantage of diversification is clearly brought out in front of you. By Diversification, you are clearly giving an advantage to yourself. On one side you first protect yourself, then save and finally invest. All these three measures of protection, saving and investment when clubbed together forms diversification. Thus Diversification reduces the overall risk level, gives you the capacity to overcome different market conditions and thereby help to increase the overall profits for you. So diversification is a solution to ever increasing risks of investment. Diversification teaches us “not to put all of our eggs in one basket”. If one basket falls you have other baskets to look upto and depend upon. Diversification is the need of the hour for any investor who wants to invest wisely and smartly.