Diversification - Why it matters in an Investment Portfolio

1. Why Investment Portfolio Diversification Matters?

2. Outline of Contents • What is an Investment? • What is Portfolio? • What is Diversification? • Different Asset Classes • Brief discussion of Asset Classes • Advantages of Diversification • Conclusion

3. What is an Investment? Investment is the process of using your money to buy an asset that you think has a good probability of generating at or above market returns over time.

4. What is Portfolio? A Portfolio is a collection of investments held by an individual, investment company or a financial institution.

5. What is Diversification? Diversification is the process of allocating capital in a way that minimizes the exposure to any one particular asset or risk.

6. Different Asset Classes Some commonly used Asset Classes to Diversify Investment Portfolio are:- • Stocks • Bonds • Commodities • Real Estate • Mutual Funds etc. (Continued...)

7. Stocks These represents shares in publicly held companies. If you are interested in long-term investment, this is one option for you. You can earn good returns if you take risks but you need to hold them for a long time.

8. Bonds Defined as a kind of debt where you are a lender instead of a borrower. If you are risk averse, then this will be good investment for you but these will suffer during inflation.

9. Commodities These include physical goods such as gold, copper, natural gas, electricity etc. Even in Inflation, you get good value for these but the problem with these is their volatile nature.

10. Real Estate It is investing your capital in land, buildings etc. Real estate investment is considered as one of the finest investment options from centuries. It is the best in providing a long term financial security. Despite its benefits, it also face market & liquidity risks.

11. Mutual Funds It is Pool of Savings for multiple investors. Called as Mutual funds because all the risks & returns were shared based on the proportion of investments. This provide you good diversification but it has market & interest rate risks

12. Advantages of Diversification • Reduces Risk: For example, If you invest in only one of the asset classes and it performed poorly, you endup in losses. But if you place your investment in different asset classes, if one performs poor the other may perform better and balance your loss • Capital Preservation: Capital appreciation is important but capital preservation is also equally important. Investing in different asset classes helps you in preserving your capital • Better Returns: Diversification helps you in risk adjusted returns

13. Conclusion Note that, an investment portfolio should be constructed in such a way that it should meet the financial needs and goals of an individual. There is no need to invest in every asset class. But, before investing in something, have a clear picture of it and then allocate your investments accordingly. “Wide diversification is only required when investors do not understand what they are doing” - Warren Buffett

14. Thank You!