Why the word “Diversification” is given so much importance in Financial Planning?

diversification Importance

There’s very common saying “Do not keep all your eggs in same basket. Diversification means same, do not invest in only one asset class/only one sector. In India people generally prefer in investing in only two asset classes which are Gold & Real Estate.Historically they are known to give good returns & less risky,But in order to secure your portfolio from all ends & to earn more than inflation rate “Diversification” is very important.

Reasons to Diversify

  1. Mitigates the Risk : During the financial Crisis of 2008,Real estate rates came down drastically in USA & its effects were felt across the world.So even real estate can be risky.Hence a person who has diversified his investments will be less affected during a crisis than a person who has invest all his capital in one asset.
  2. Key to beat inflation : If diversification is done properly then it can beat the inflation & can provide better returns than the market.

How to Diversify your Portfolio?

  1. Check your Portfolio : In order to diversify people should first check their portfolio & analyse their existing invesmtnet.They should know their amount of exposure to each of the asset class.
  • Goals : Before Diversifying people should be clear with their goals (Both long Term & Short Term) and based on that they should invest.For Example : If a person has a long term goal & He/She has just started earning then they should invest more in equity as it known to give higher returns.
  • Do not over Diversify : Sometimes people in order to diversify,they over diversify. For example.they invest in two/three similar schemes of different Companies.
  • Hire a Registered Financial Planner : A financial Planner is professional who not only take care of your invesmtnets on your behalf but also gives you time to time advice on the Market Scenario and accordingly guides you to How to allocate your porfolio &  also in What Proportion.Hiring a professional is always the best option if you are not able to track your investments.Always hire a Sebi Registerd Financial Planner/Advisor like www.moneyfrog.in where one can monitor & track one’s investments as per Financial Planning & Life Goals online,as well as speak & have periodic reviews with qualified advisors
Pujan Jain
Pujan is working as Senior Wealth Manager at Moneyfrog.in & has 3 years of corporate experience in Financial Markets.He has worked with ICCL (A wholly owned subsidiary of BSE).He holds dual post graduation in Financial Markets from Chitkara University (Punjab) & Bombay Stock Exchange Institute Ltd (Mumbai).He is an avid reader & freelance content writer.

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