Minimize the Risk - Diversify your investment portfolio

Till 2007, Financial crisis, Economic slowdown and global recession were dragon kind words in books for me and I had worked on lot of case studies as part of curriculum. 

As a young professional with little experience in building a robust portfolio I had more inclination towards Equity. In 2006 and 07, the focus was towards studying company profile and IPOs for investment. By the end of 2007 my 100% investments were lying in equity shares of various companies and I use to treat that as diversified as my investments were not concentrated in only one sector. 

Sensex was soaring at 20,500 plus and my last equity buying was somewhere in first week of Jan 2008 and guess what ? Immediately next day Sensex fell down by 5% and global recession started showing a dent on my portfolio.

Entire 2008 I neither could dare to buy any other Equity shares nor could exit the market. By the time year ended I had lost more than 50% of money. So I learnt hard the meaning of diversification.

In context of diversification of portfolio one need to first of all study the risk appetite and short term and long term goals from portfolio.

Human tendency is that we get attached or familiar with one kind of investment mode and forget to balance our portfolio to insulate it from external dents. There are people who love to invest in Equity only (my old version), some in real estate, some in jewelery, some in mutual funds and some leave the money in bank as FD etc. However everyone dream to get highest return out of their hard earned money. 

Also do not choose any product or instrument which you find difficult to understand or interpret. Normally people find it difficult to understand ULIPs with their complicated structure of return and charges, and those are meant to cheat people. So stay away if you dont understand it.

Here are some ways to diversify the portfolio :-

• Invest some money in Equity as per your risk appetite.
• Consider Mutual Fund products for sustainable return
• Invest in Real Estate if your portfolio is bigger enough for such investments
• Consider Fixed Deposits to stay away from stock market uncertainty
• PPF a good tool to get fixed return and income tax benefits
• Bonds, NSC and Debentures for fixed rate of income
• Insurance, a good tool for investment and Insurance cover
• Gold, for returns in line with market and a shock absorber in adverse times.

Proportion of allocation depends on your risk appetite and goal.

If you have done this, one thing is sure that you will continue to get a sustainable return from your overall portfolio and risk is minimized.