S2 EP 7- Diversification: Not just about shielding your investments

[00:00:00] Welcome to Axis Moneynomics by Axis Mutual Fund Hey Salini, you remember when we were kids, you know, we loved collecting different kinds of toys. You know, I remember I had so many toys to play with. I had building blocks, cars, puppets and what not.

[00:00:22] And the thought was that if one of those toys broke, you know, I could always play with the other toys or sometimes in earth could be that. I'm just not in the mood for blocks. I just want to sort of zoom around in those toy cars.

[00:00:35] No, so in the financial world also we need to ensure that our portfolio works for us, even when some of the assets don't perform right. Absolutely Hari, by the way, do you know this approach is called diversification?

[00:00:48] And even when you were buying different kinds of toys or collecting different kinds of toys, you were basically diversifying your portfolio of toys so that you had everything. If one was not working, you had the other to take care of or the other toy to play with.

[00:01:08] Hello and welcome to another exciting episode of Axis Moneynomics. This is Hari from Axis Mutual Fund. Before we plunge into the world of diversification, let's recap a little bit. In our previous episodes, we have explored various aspects of personal finance right

[00:01:26] from creating a financial plan, introducing to the world of mutual funds and so on. If by any chance you have missed any of those episodes, worry not. They are just technically covered on multiple platforms. And don't forget to follow our podcast to stay on top of your finances.

[00:01:43] Coming back to today's topic on diversification, Charlene, let me begin by asking what is diversification? Diversification is a plan B. You know when life throws you a curveball? It is that plan B. It is like a spare battery that you should always have at home,

[00:01:59] in case the current one gets discharged. Likewise, in the world of investments, diversification refers to spreading your investments across different asset classes. It could be stocks, bonds, gold and more. And why also just stay within India? You can also invest across geographies outside India. Global diversification helps reduce

[00:02:17] concentration risk in domestic markets. So this is diversification. Nice Charlene. So diversification is all understood. But tell me, why should even one look at diversifying the portfolio? Why should one diversify portfolio? Because it helps you to lower risks.

[00:02:32] Now let me give you one more analogy. Imagine you are on a ship and you've got life jackets of different sizes and styles. If one doesn't fit or one is not working, you've got others to

[00:02:42] rely on. In the investment world, this means if one asset class isn't performing well, the others can potentially balance things out. The result? Your portfolio will have a reduced impact of market volatility. But it's just not about safety. Diversification also opens doors to various opportunities, themes, asset classes.

[00:03:02] All right. So you've talked about what is diversification and in a video also talked about why it's important to look at diversification. But tell me, Charlene, how does one make the use of this entire diversification process in the portfolio? Diversification helps protect

[00:03:19] portfolio from concentration risk. It's not about randomly picking different investments. There is to be some thought out strategy in terms of what kind of assets do I build into my portfolio? How do we start about doing all this, Charlene? Actually, it all seems complicated.

[00:03:34] But it is not actually that complicated. It's absolutely simple. You can start by allocating your assets based on your risk profile. For instance, if you have a higher risk tolerance, you might allocate more to stocks. But if you are more risk averse, you may lean

[00:03:48] towards fixed income or debt instruments. Now let's dive a bit deeper. Within equities, you can further diversify by considering market capitalization, which means you can invest in large caps, mid caps, small cap stocks to spread your risk across companies of different sizes.

[00:04:05] And in terms of strategies, you can explore value, growth, quant and so on to ensure that your portfolio isn't overly relied on a single investment approach. One simple way of diversifying your investments is by also exploring hybrid and multi-asset funds that invest in multiple

[00:04:21] assets. Even equity mutual funds have various levels of diversification in their mandate itself. Great, Charlene. So you're saying that diversification is not just about investing in different asset classes. Within each of these asset classes,

[00:04:35] also you're saying that one could diversify in terms of stocks into market cap based diversification. You could also look at diversifying in terms of the strategies that the fund employs in terms of value, growth, quant etc. So, I think this sounds very,

[00:04:52] very simple Charlene. But I'm sure there must be something that investors should be mindful of when they are trying to do diversification. Yes, Hari. We need to be careful of one thing, over diversification. It can dilute your returns. When you spread your investments too thin,

[00:05:07] you might not get the full benefit of potential outperformance of an asset class in your portfolio. It is like having too many dishes on your plate but not being able to savor any. Right, Charlene. Too much of anything is always bad, right? Next question,

[00:05:20] Charlene. I want to understand how do you find this perfect balance of the various asset classes in the portfolio? Well, as I had said earlier, as per your risk profile and not only to the extent that diversification is required. Great, so you're saying that

[00:05:35] this profile is one of the key parameters or element to look at what kind of asset mix you should have in your portfolio? Absolutely. Absolutely, great Charlene. So just to sort of sum up, diversification helps lower the overall portfolio risk. It offers a broader

[00:05:53] investment opportunity but as Charlene talked about too much of anything is bad, over diversification could also end up diluting your returns. Please remember, it's always finding that sweet spot where your investments work together to align with your

[00:06:10] personal goals. And that brings us to the end of this episode of Axis Money Nomics, where we talked about diversification and how diversification helps to reduce overall portfolio risk. Thanks once again for tuning in. If you found this episode helpful,

[00:06:28] don't forget to subscribe and feel free to share it with your friends for exploring the world of investing. Remember to follow our podcast, Axis Money Nomics, so you don't miss out on interesting topics. Until then, this is Hari, signing off.

[00:06:48] You just listen to the Axis Money Nomics podcast by Axis Mutual Fund.