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Diversify your investments to reduce risk without compromising on returns
We've all heard the old proverb "Don't put all your eggs in one basket," which suggests that instead of relying on one plan or resource, diversify.
The fundamental principles of constructing an investment portfolio are based on this age-old adage.
The Modern Portfolio Theory was pioneered by American economist Harry Markowitz. He first introduced this theory in his paper "Portfolio Selection". He was later awarded the Nobel Prize for his work.
The modern portfolio theory argues that a portfolio of multiple assets (diversified) will result in greater returns without a higher level of risk. Refer to link to read more on modern portfolio theory.
Key Principles of Diversification
Ram achieves no diversification if he invests all his money in fixed deposits.
If Ram invests all his money in fixed deposits but distributes it evenly among several banks, he obtains diversification. However, the benefits are limited because the risk and return characteristics are identical.
If Ram invests his money in a variety of assets, he gains a better level of diversification in his portfolio (mix of Fixed deposits, Mutual Funds, Gold, Real estate). Such a diversified portfolio's risk and return characteristics are far superior. Superior implies more return for the same risk.
Factors to consider while constructing multi asset portfolio
Investment time horizon
Maximize your post-tax returns
Risk tolerance of the Investor
Cost/Expense of investment
Investment Products That Are Regulated
At India P2P we endevour to create rigorously diversified investment products. Check out more on www.indiap2p.com
Author: Ravinder Voomidisingh
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