Why is it important to diversify your financial portfolio

One of the most important principles of investing is to ensure that you have a diversified portfolio to not be reliant upon a single investment for all of your returns. The key benefit of diversification is to help you to minimise the risk of capital loss to your investment portfolio. Diversification is spreading your risk across different types of investments to increase your odds of investment success. It's like betting on every one since no one can know for certain who is going to win the race because markets can be volatile and unpredictable. By diversifying your portfolio, you minimize the consequences of a wrong forecast. Your portfolio should include a mix of growth and defensive assets:

  • Growth Assets include investments that generally provide long term capital gains. For example, shares.
  • Defensive Assets include investments that provide a lower return over the long term but are less volatile than growth assets.

Generally, some investments will perform better than others over a specific period depending on a range of factors including; current market conditions, interest rates, rate of inflation, etc. To achieve smoother and consistent investment returns, diversify your investments.

Practically, diversification is holding investments that will react differently to the same market or economic phenomena. For instance, when the economy is booming, stocks tend to outperform bonds. But when things slow down, bonds often show better results. By holding both stocks and bonds, you can reduce the chance of your portfolio taking a hit when markets fluctuate.

Diversification not only minimizes the risk of loss to your overall portfolio but also exposes you to more opportunities for return while safeguarding you against adverse market cycles. For more such tips and information, watch Pehla Kadam Season 5 only on CNBC Awaaz.