What is Portfolio Diversification
What is Portfolio
A portfolio is a collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents and mutual funds.
What is Portfolio Diversification
Portfolio diversification is the process of investing your money in different asset classes and securities in order to minimize the overall risk of the portfolio.
Invent in multiple mutual funds instead of a single fund, and it helps to reduce the risk.
Portfolio diversification by fund type
Example Diversification
| Person | Investment Amount | Invest in Equity Fund | Invest in Debt Fund |
|---|---|---|---|
| Person A | 10 | 10 | |
| Person B | 10 | 5 | 5 |
| Risk Level | High | Low |
In above table
Person A invest the amount only in Equity Fund and it is high risk.
Person B invest the same amount in both Equity (High risk) and Debt Fund (Moderate risk)
Scenario 1: Market is high
There is no doubt!. Person A return is better than Person B
Scenario 2: Marker is low
Person A loss is greater than Person B. In detail,
Assume Equity fund is in negative trend falls 10% and Debt fund remains a positive or flat trend
Person A’s Loss is 1 rupee and invested in Equity Fund only
Person B’s Loss is 0.50 paise because he has a diversified portfolio, invested in both Equity and Debt funds
Conclusion
Portfolio Diversification is use to reduce the loss of principal investment when mutual fund performs negative. You should consider these concepts while selecting the fund.
Click here How to invest in mutual fund
Happy Saving!