India markets closed

Why Is Diversification Important When Investing Money?

Adhil Shetty
Image source: schantalao/Freepik

Q: Why is diversification important when investing money? – Chinmaya

A: When investing money, you can either put your entire fund in a single asset class or distribute it into different assets. Spreading your investing corpus in different products on the basis of the nature of asset, risk, tenure, etc. is called investment diversification.

Investing in a single asset can be highly risky as you stand to lose money if that instrument underperforms. On the other hand, if you distribute your investment in different asset classes, then non-performance of one or two assets will not significantly impact your entire investment.

For example, suppose you invest your entire corpus in a single share. If the particular share gives negative returns continuously, your entire investment will get impacted. However, if you diversify your investment in different shares under equity class and some investment to other assets like a fixed deposit, a debt fund and gold, then it’ll reduce the investment risk in your portfolio.

Diversification can also help you to allocate funds in different assets as per your financial goal. It also increases flexibility and liquidity in the portfolio.

Have a question on personal finance? Ping me on Twitter at @adhilshetty with the hashtag #AskAdhil