Diversification and Why you should do it.

You might have often read that in order to generate wealth and being a successful investor, you need to diversify. Many of the greatest investors have a diverse investment portfolio. If you are about to start investing, read this blog to learn more about what is diversifying and why you should do it.

The famous saying "Don't put all your eggs in one basket" holds true for investing as well. Diversification is nothing but the process of investing your funds in separate investment avenues instead of concentrating it in one investment.

Diversification can be classified into two categories:

Asset based diversification - In this an investor diversifies by investing into separate asset classes like equity, bonds, debt, real estate etc.

Industry based diversification - This mainly applies to equity investments wherein an investor diversifies their funds into various industries like technology, finance, power etc. 

Benefits of diversification

• Diversification is beneficial for an investor because it reduces the overall risk. In times of uncertainty, some asset classes tend to fare well compared to other. This reduces the risk and possible losses an investor might face.
• Diversification is also helpful as it can aid an investor to reap benefits from several sources. Fixed income from debt, increase in commodity prices, stock dividends etc. Can all help in creating additional revenue streams.
• Through the process of diversification, an investor can easily re-allocate funds to better performing asset classes or investment opportunities. 

As an investor, it is important to regularly monitor your investments and reshuffle them as and when necessary. Some investors may prefer higher concentration in a particular asset class or industry therefore it is important to know your own risk appetite before making investing decisions.