Normally, investors confuse the terms of Diversification with Allocation of Assets.
Let us first, understand the concept of diversification of investments. Diversification is like having different investments in a single Asset. And asset allocation is classification of different assets and investing proportionally according to our risk tolerance capacity, investment horizons, our expectations of returns from that specified asset. Asset Allocation is like spreading out your investments to more than one Asset class. And Asset class is different type of assets like Debt, Real Estate, Gold, Silver, Commodities, and Equity etc.
Diversification is further options available in that specific asset. Say like in Debt asset allocation, we are having investment options like Bank Fixed Deposits, Post Office Savings Schemes, Companies Debentures, GOI Bonds, and different Debt Funds of Mutual Funds.
One must understand all type of asset got there own merits and demerits and all are different in basically as well as broadly. Here, we should understand that every time all assets are not in demand. Every thing got it lean phases, but that does not mean that when that specific asset is not performing, its future is bleak. We should allocate our asset into a disciplined manner. Say, if one could have stick to 50 % allocation to equity out of ones investments during 2003 to 2007, he could have earned handsome returns, out of equity boom and later on during this current lean phase, he could have reinvested into equity at a lower level out of profit/returns generated and shifted to another assets. Allocate your investments in a disciplined manner and shift the profit/returns to different assets, by sticking to your long term investment goals.
For instance, when, we go to a restaurant, we have a choice of variety of food like South Indian, Mughalai, Chinese, and Continental etc. Here, when we pick South Indian then, further we are having choice to take Dosa, Idli, Vada, Utpam etc. So, here we can say, Dosa, Idli, Vada, Utpam are sub category of a Category. The same is diversification; it is further classification of a class. At the first instance, we should decide about investing in different asset class, like Equity, Debt, Gold, etc.
Take another example, if continuously we take a single type of meal, even tasty meal become tasteless. We, regularly change our food for variety, but of course stick to our basic food intake. And even doctors and dieticians recommend balance diet. Balance diet is also like allocation of asset..@
~
http://indianmutualfundsonline.com
TOP
