TomorrowMakers

If you are a parent currently investing in your child's education as your primary goal, diversification in investing is a way to increase your peace of mind and potential fiscal growth for you and your family in the long run always.

Highlights:

• Diversification is a way to mitigate risk by not keeping all eggs in one basket.

• Diversification in investing can be done by spreading investments across sectors, companies, types of funds, etc.

• Some mutual funds take the onus of diversification with some set parameters, which makes them a good target for single fund strategies.

• Portfolios need to be rebalanced periodically based on your risk affinity.

What is diversification?

Diversification in investing means decentralising your investment by spreading it around based on sector, types of funds, underlying assets, nationality etc. Diversification is done to keep your risk low while still being somewhat aggressive in investments, to ensure higher risk-adjusted returns.

Also Read: Best ETFs to Invest in India 

Different types of risk

In finance, risk is categorised as systematic and unsystematic risk. Systematic risk (aka market risk) arises from factors such as inflation, exchange rate changes, government instability etc. and affects all sectors. Diversification doesn't tackle this risk. The unsystematic risk or diversifiable risk refers to risk related to any one company, sector or a specific country and it is largely mitigated via diversification.

Benefits of Diversification:

The major benefit is, obviously, the risk mitigation that happens by spreading your investments around. Diversification also somewhat insulates your investments from downturns in economic cycles if they affect a certain section of the economy.

How to Diversify?

You can invest directly via stocks, bonds and certain short-term investments. Other investment options include Commodity-focussed funds, Real Estate Funds, Sector funds etc. which all stick to certain segment of the market. There are also asset allocation funds, like certain mutual funds or ETFs, which focus on diversification based on specific parameters. They can be a single-fund strategy for people unwilling to put too much effort into portfolio management. 

Also Read: Best Equity Mutual Funds to Invest in India

Impact of Time

You will have a varying risk aversion based on when you would need liquidity. In case of your child's education, 10-12 before they graduate, you may have a higher risk affinity. As such, you can invest in smallcap, largecap, flexicap funds etc. and take on more equity. As your child's graduation nears, you may need to rebalance your portfolio with risk mitigation in mind. Going for Hybrid Funds or buying debt is a viable strategy for such cases.

Conclusion:

Diversification is done with the primary goal of increasing your risk-adjusted returns. Investors should understand that zero risk is not a possibility. Risk is not something to be feared, but something to be used.

Disclaimer: The information in this article is intended for general informational purposes only and should not be construed as financial advice. Readers are advised to do their research and due diligence before making financial decisions. 

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