What is Diversification?

Many people have heard or read about diversification but may not be aware of what it really means. Here is an attempt.

One girl came up to me and said I need to invest in ELSS (equity linked saving scheme) for saving some Income tax what should I do. I suggested Hdfc Tax Saver and said you could put Rs. 90k – the amount that she wanted to invest. She instead decided to invest Rs. 10,000 (in each of the schemes)  in 9 schemes – Hdfc Tax Saver, Hdfc Long Term advantage fund, Templeton, Icici Prudential, Sbi Magnum, Dsp Blackrock….She felt comfortable doing that I guess.

Somewhere you have to draw the line between diversification between diversification and over-diversification. The above case was clearly a case of over-diversification.

Diversification happens across:

Asset classes: Growth assets (equity, land and property) or Income generating assets (fixed income, cash, property).

Region: In a large country like India you may not feel too worried about not diversifying outside India, but in smaller countries there may not be enough investment opportunities. In India for portfolios in excess of Rs. 150 Million there should be some exposure to other parts of Asia, Europe and USA.

Across Industry sectors: When you try diversification across metals, auto, auto ancillaries, commodities, services, pharma,  banking, entertainment it becomes a nightmare for a retail investor to create a sensible portfolio.

Across Industry Houses: Creating a portfolio across Tatas, Birlas, Multi National companies, Murugappa group, smaller groups, bigger groups etc. – necessary to reduce the risk of one group going down!

Across Capitalization: Some money being invested in Large Cap, Mid Cap, Small Cap is essential for diversification seekers.

Across Investment Styles – Value, Growth, Hi growth, are all important while diversifying your portfolio.

Across Fund Houses: When you are investing in Hdfc, Templeton, Icici Prudential etc. you are diversifying across fund houses – just in case…something goes wrong with a particular house..

Across Time zones: Some money of yours is for 3 weeks, some for 30 years – this is diversification across time zones

Now for an individual to keep all this in mind before he / she buys a scheme or an equity share is not simple – so there is the need to seek professional help or LEARN, now.

Related Articles:

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

2 Responses to “What is Diversification?”

  1. you seem to be too obsessed with murugappa group. seem to be dropping their name very too often. I dont think chola group is so fascinating to be worth mentioning so many times. The business is done so unprofessionally there are better performing companies in the south the sriram group or the sundaram finance group. The sundaram finance are more responsive to a business associate or their customers and add good value to shareholders unlike the chola. you just try interacting with the chola office as a customer anonymously you would know… i too am a shareholder in choladbs and other companies but found the management more wanting

  2. Sriram group? The same one whose MF license got suspended, but got the life insurance license? Jay u got to be joking if u are in financial services and know something about the reputation of Sriram group! Subramoney has said in public that he has made money from M group – I have no clue whether it means anything for me. Nor do i know whether it is useful for ME in the future! But yes, I have dealt with Chola Insurance and vowed that I will not go bak to them but that does not mean I will sell my Coromandel Fertiliser shares 🙂

Leave a Reply

This blog is kept spam free by WP-SpamFree.