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Diversify to mitigate the Risk

Since the second half of 2003, we have seen the longest bull run in the domestic equity markets. Investors created significant wealth over these years and in the process we all forgot the basic principle of investing - diversification. Although we all believe that investments in equity is the best tool to counter inflation, and we also believe the growth will take place over the long term, short-term jolts can be severe and can take away a significant part of the gains. The last six months have forced us to rethink the mistake that many of us made, namely, putting all eggs in one basket.

Alternative investing is an effective diversification tool that has been much talked about, but seldom practiced, especially in a buyout market. It's the golden rule of investing, and is a critical part of a thorough financial plan to appropriately allocate assets that suit one's personal objectives, risk tolerance and time horizon. For most, a mix of traditional investments such as stocks and bonds is a suitable approach. However, more affluent and informed investors should also consider alternative investments to further broaden their portfolios.

The three broad ways by which one can diversify one's portfolio are:

  • Asset class diversification,
  • Strategy diversification, and
  • Geographic diversification.

  • Asset classes

The most common and traditional form is diversifying across various asset classes, such as equities, fixed income, real estate, commodities like bullion and crude, and so on. However, many investors will readily sacrifice this discipline when a particular asset class is faring exceedingly well. As a result, their allocations become distorted.

There are dedicated products that offer great investment opportunities across various asset classes, and a few of them also offer hybrid structures that combine strategies and work well from the portfolio diversification perspective.

  • Strategy diversification

Diversifying your portfolio across various strategies is another way to de-risk it, especially when you're principally bullish on a particular asset class. This helps you participate in the same market through various products and strategies that diversify risk. For example, a direct equity investor must also consider options like diversified equity mutual funds, thematic funds, portfolio management services, and hybrid structured products, depending on his specific risk profile.

  • Geographic diversification

However, one of the most important issues in the current scenario is to diversify the portfolio geographically across economies worldwide. As we all know, different economies have different growth cycles and different times, which keep the balance in the portfolio intact. It had been a distant dream for many investors. However, now investing in overseas economies is simpler and seamless. These investments can be made in two ways. First, the Reserve Bank of India (RBI) allows you to invest up to $200,000 a year in foreign markets. This allows investors to buy into foreign funds that can be further diversified into various funds, based on the investor's objectives.

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