DIVERSIFICATION - ART OF RISK MITIGATION

Diversification:

Instead of putting all the eggs in one basket, put it in multiple baskets. A famous quote which says to lessen the risk with diversification strategy. Same applies to investments as well. Rather than investing all the amount into one option, spread into various options available. The main reason for diversifying is all the investments options like equity, bonds, real estate doesn't have similar characteristics. Through this risk can be controlled to a better extent than without spreading. Let's consider an example, 

Case 1: If I purchase equity shares of Infosys today and due to uncertainty and market fluctuations, the price sharply declines in one year. So the whole amount imvested will turn out to show loss. 

Case 2: If I purchase Infosys with 20% of amount, HDFC stock with 20%, Tata Motors with 20%, Dr Reddy's lab with 20% and Nestle with the rest 20%(in any of combination) Since all of them belong to different industries (IT, Banking, Automobile, Pharma and FMCG) there is high possibility that due to their different characteristics they won't have same movement. They would be negatively correlated which would protect the investment. Even if one industry experiences decline the other industry benefits from surge and appreciation. During COVID when market was experiencing bearish movement, Pharma and healthcare industries have surged. So this is one of the strategy to diversify different equity stocks based on their specific industries. 

Case 3: Investing the amount through different options available like equity, bonds, fixed deposits and so on. In this type regular income can also be generated, if the person purchase a bond/FD he would get interest regularly without waiting for capital appreciations. It is also combination of less risky investment (Debenture & FD) and high risky investment which is equity. 

 

Of these 3 Case 1 is very risky and Case 3 is slightly less risky. Equity is subject to market risk (which is uncontrollable) also known as systematic risk. The specific industry risk is known as unsystematic risk which is what mentioned in Case 2 

Impacts:

1) Risk Management:  Though the risk can't be completely eliminated, it is reduced to a wider range.

2) High Return:  On an overall basis return generated will be certainly higher.

3) Stable portfolio: When combined together the portfolio would be on a safer side.

INVESTMENTS - WORLD OF FUTURE

INVESTMENT: An investment on asset is done to generate wealth in the future. Why do most of the people tend to focus on investment?? It's simple, inflation rises the price of goods and services which our income solely might not compensate. This acts as another source of income in future either through appreciation or dividends/interest received on those investments. Focusing on who should invest, there is no age limit, even an older person could get benefitted from it. The right time to start the investment is "Now", it's always better to start anything from today without waiting for tomorrow. In a day everything can change, if we can start now then the power of compounding takes us to greater heights. There are multiple ways on how we can spend our hard-earned money to multiply. Here are some good sources: 1) Equity: Investment in equity gives us regular dividends and gains through the form of capital appreciation. As time moves on, the value of investment rises. One good example is MRF (Madras Rubber Factory) stock. One stock price of MRF in 2002 is around 850 rupees and today it is worth more than 1,50,000 rupees. One stock gave ROI of approximately 17000% which is a massive growth. Not just buying stocks, we can also perform trading on the equity stock and gain profits in a single day. But if everything goes on then where is the trouble?? They are subject to market risk and fluctuate based on market movements. However, a proactive approach and diversification would help overcoming this which we will be exploring in the coming blogs. 2) Bond: A company have various options to financing. It can borrow from banks by pledging some collateral or it can take loan from general public like us. By lending to the company we receive interest either monthly, quarterly, semi-annually or annually depending on the indenture. At the end of the loan period the company pays back the loan amount. There are multiple types of bonds which we will see further. But of all bonds generally a government bond is considered risk free, as there is no default risk associated with it. Credit rating agencies will rate the company's bond whether it’s a good bond or junk bond based on its credit repaying abilities. A good bond pays low interest and junk bond pays high interest, but the risk will also be high. 3) Bank deposits: Of all the investments, this is the safest but it yields low returns. A fixed deposit is depositing a large sum of money in the bank for certain period from 7 days to 10 years. The higher time we hold the more interest we will receive on that fixed deposit. We can't withdraw this money and it should be left undisturbed for at least 5 years to see the return. Different banks provide different rate of interests and senior citizens would get better interest rate. 4) Gold: I always heard my 80s born parents saying that, it's difficult to purchase gold in the coming future. No doubt the price is sky high even now, but down after several years it becomes expensive and galaxy high price. In 80s 10 grams of 24 karat gold worthed 1500 rupees and today it's close to 1,00,000. In just a year from 2024 to 2025, the value appreciated by approximately 30%. So, gold and silver are also worth to consider as an investment option. 5) Mutual fund: Nowadays the term SIP (Systematic Investment Planning) is buzzing around. But before that in a Mutual Fund, large pool of money is gathered from the huge sum of investors and instead of we buying the stocks/fixed income securities. A specialised fund manager manages the portfolio to optimise the wealth of the investors. So, investors need not spend time on selecting stocks, rather they could just monitor their funds. This comes with two options, we can either invest lump sum (at a time invest all the money) or SIP, where every month we invest some amount rather than one time. This SIP starts from minimum of 500 per month. Similarly at the end we can withdraw our amount at a time or step by step through SWP (Systematic Withdrawal Plan). These are just a very few options to invest money, but definitely worth it to be considered during this period of time. These all are subject to market risk and only when there is risk there is a scope to returns!!!!