Risk and return are two sides of the same coin. The more risk you take, the more returns you might generate. But if things don’t go as expected, the losses can lead you to ruins. Hence it is essential to mitigate risk by diversifying your investments.

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Recently, the habit of investment has engulfed India with new investors, young and old, entering the market. This brings with it a vast audience who do not properly understand what diversification is, or if they do, they do not know how to diversify efficiently.

Diversification of investment, to put it simply, is not betting your money on just one horse running in a race, but on multiple horses running in multiple races, and even some car races abroad! An investment without diversification is no less than a gamble. Let’s understand the main strategies of diversification through an example-

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Mr Akash wants to start investing in the markets with a capital of 1 crore. He recently purchased a TATA Nexon and is very happy with its performance. Even the showroom salespeople were very friendly and skillful. Hence should he invest all of his money in TATA motors?

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No. A company may be performing well now, but you never know what will happen ten, five, or even one year down the lane.

Mr Akash decided that instead of investing in just TATA Motors, he would invest in multiple companies in the automobile sector. This is diversification at the company level. But is this the smartest decision? Again, no. If the automobile sector underperforms due to increased factor costs and demand shift, Mr Akash’s capital will be wiped away.

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Hence Mr Akash decides to invest not just in the automobile sector, But also in the energy and manufacturing sectors. Diversified enough? NO. Any drastic change in the macro environment like the depreciation of the rupee and increased cost of production would affect all three sectors similarly.

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Now Mr. Akash invests in more sectors like IT, Banking, insurance, export, etc. Now, not all his sectors are correlated and would withstand the turbulence of market volatility. But what if, the whole Indian market suffers a recession? The choice of sector will not matter then. Mr Akash should also invest in debt instruments like bonds. These are not affected by the market conditions much and are relatively much safer. Since they are safer, the returns that they provide are also on the lower side.

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Now Mr Akash has a very diverse and risk-averse portfolio. But you can take this a step further. Investments in overseas companies and instruments can be made to take advantage of the economic conditions of foreign markets. Investment in gold instruments like gold bonds and ETFs can be made which are very much less volatile. Real estate, REITs, InvITs, etc are also other avenues where diversification is made.

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By following these strategies, investors like Mr Akash can create a balanced and diversified portfolio that mitigates risk and maximizes returns. Remember, the key to successful investing lies not just in diversification but in informed and strategic diversification. Over-diversification is also not good. An investment in every instrument possible will not give you the returns desired.

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Educate yourselves about the market conditions and trends and make adjustments in your investments as necessary. Investing is a journey with diversification as your companion helping you mitigate the risk from volatility. By using it wisely, you, like Mr Akash, are sure to make a balanced portfolio that will guarantee you stability and growth.

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