It'a a story about a few years ago
When we were younger and we used to go out with our family
And even today I remember my father's habit
That when we went out, he used to take everyone's money
And keep it in different places
And he used to say that if we keep the money in different places
And even if one person lost some money
Then we wouldn't have that much risk because our money was kept in different places
And that is something we find relevant even today
When we talk about investment
Because in investment I feel that when we get money
Then why do we put our money in one place?
Why don't we use that strategy and keep that money in different places
So that our risk also reduces and our returns also are moderate
And if I give this concept a name
This is a very important concept whenever the topic of investment comes up
And the name of this concept is diversification
So today in this video we will talk about diversification
And I will tell you why diversification is important in investment
And how you can make good returns by diversifying
And apart from this, reduce your risk as well
And I will also tell you, that in different categories of mutual funds
Where is there more risk
And while diversification what are the things you should pay attention to
First we will define what diversification is
The meaning of diversification is that you should not keep all your eggs in a single basket
Which means that you should not keep everything in one basket
Instead you should divide it in different places
I will come back to investment
How relevant this topic is in investment
And how much this impacts us as a retail investor
So the first and simplest meaning of diversification if I explain it to you
Consider that you have one lakh rupees
How can you divide this one lakh rupees in different places
How you can put it in different assets
How you can put it in different mutual funds
Because if I talk about mutual funds then we have hundreds of options for mutual funds
Where we can put our money
And this is the first question in people's minds
In how many mutual funds should I put in my money
Should I put in all the money in one mutual fund?
Or should I choose five mutual funds? How do we decide these things?
In the mutual fund industry diversification mainly fulfils two of our objectives
First, risk
How much risk do we have?
Like in this series, in our old videos, I have told you many times
For one investor, it is most important for them to identify their risk
How much is my risk and how much risk can I take?
It is said and it also happens in investment that if you
Divide your investment in different mutual funds
Then your risk gets optimised and a little minimised as well
If you choose your mutual funds in the right way
By this, if you put all money in one mutual fund then your risk is higher and if you put it in multiple mutual funds
Mutual funds and diversify your portfolio
Then your risk is minimised it becomes a little lesser
And apart from this, like we always say
Higher the risk, that's how much return we can expect
But vice versa isn't always true
And apart from this, if you do diversify
So our second objective, which is called returns
That is also fulfilled. How does that happen?
Consider that I had one lakh rupees
I put 20,000 rupees in five different mutual funds
And what happened was that one mutual fund performed very badly
But my portfolio did not become that bad because of it
Because I distributed my portfolio in five different mutual funds
So the second biggest benefit of diversification is that
If one of our assets doesn't perform well at one time
Then our other assets
Then it optimises our total returns and our total returns come out to be moderate
Now the question comes, how can I diversify?
How do I choose which mutual fund so that my portfolio stays diversified
The biggest question in investors' minds is how can I diversify?
I have some money and I have a lot of mutual fund options
So which mutual fund do I choose
So that my overall portfolio is diversified
Let us answer this question
When we talk about mutual funds, we have some broad categories
Like, equity mutual funds
Debt mutual funds
Apart from this in these mutual funds we have subcategories as well
Like if I talk about equity mutual funds
Under this we have some subcategories
Large cap, mid cap, small cap
In debt funds as well, there are many categories
So whenever we talk about diversification, we can mainly diversify on two levels
First, on a broad level
Like if I talk about broad level
That I have Rs 100 that I want to diversify
And I know that I don't want to take a very high risk
And in the case where we don't want to take a very high risk
Then we always say that we should invest in debt funds
So if I talk about diversification on a broad level
I want to diversify a Rs 100 investment
And I know how much your risk is
That you can take only a 30% risk
And I want to put 70% in a safe place
So what I will do is put 70% of my entire portfolio in debt funds
Because if we look at it, debt funds are slightly less risky
And I will put 30% in equity mutual funds
Doing this, I can diversify my portfolio on abroad level
But now this question would've come in your mind
That you told me to put 30% in equity mutual funds
But under that also there are three different categories
So how do I choose from that, that under that the second level of differentiation
How can we implement that well
Now I will tell you about the second level of diversification
And in this I will tell you a very important that, in diversification it's very important
That you should know how much your risk is
And where you're going to invest, how much risk does that asset have
So that you can match both the risks and make an optimal portfolio
So that your risk is also not high and you get moderate returns as well
So I will come back to that thing
That I told you I don't want to take a very high risk so I put 30% of my portfolio in equity
I put 70% of my portfolio in debt
So the next question in my mind is that the 30% I have in equity
How can I further divide that
Because for that there can be a lot of permutations and combinations
Consider that the 30% investment that I made in equity
I want to further diversify that which I call the second level of diversification
So in that I will gauge my risk again
That in equity do I want to take a high risk or not
Consider that there are two types of investors
First, who wants to take a very high risk in equity
So what will he do, in equity there are mainly thee categories
Large cap, mid cap, small cap
If I talk about large cap, it has very big companies
So the risk there is slightly lower as compared to mid cap and small cap
And small cap has the highest risk
When we compare it to anything in the entire equity category
Consider that there is an investor who wants to invest Rs 30 in the equity segment
And he wants to take a very aggressive risk in the equity sector
What will he do?
He will put his entire investment in small cap because he wanted to take a very aggressive risk
But now, another investor came about who doesn't want to take a very high risk
He wants to take a moderate risk
So what he does is, he takes that Rs 30
And further divides it
What he might do is, put Rs 10 in large cap
Put 10 in mid cap and 10 in small cap
Now another investor like you or I comes
Who doesn't want to take a very high risk
But we want to be very defensive while investing
So what we do is, out of Rs 30
Invest Rs 20 in large cap
Because there is very little risk in large cap as compared to other options
And a five rupee investment in mid cap
And a five rupee investment in small cap
Why did I do this? Why did I invest that extra in mid and small cap
So the biggest reason behind this is that
So my overall portfolio which was of Rs 100
Out of that I invested on 10% aggressively
In mid cap and small cap
If it goes down then my overall portfolio won't be affected that much
But consider that these two segments perform really well in the coming time
Because of which the overall returns on my portfolio
It comes out to be really good
So this is the biggest benefit of diversification
That our of Rs 100 you only invested Rs 5 in small cap
Rs 5 in mid cap
The rest of the 90%, you invested in very safe assets where the risk is very low
But if this 10% investment gives good returns in the coming time
Then the returns on your overall portfolio turns out to be really good
So I will assume that you have understood how you can diversify in equity investments
And what is the use of that on our overall portfolio
And how it can increase our returns and optimise our risk
First I will tell you how you can diversify your portfolio by investing in debt
Because my overall portfolio was of 100
I told you about 30
Now the 70 that is left are you going to invest that directly in any debt mutual fund
But no, we cannot do this
Because if you blindly invest in any debt mutual fund
Then it is not necessary that your risk has become very less
Because under debt mutual funds also there are a lot of subcategories
Which I told you about in previous videos
And for all those categories there is a separate defined risk
So as an investor you have to pay attention here
That in debt category which category do you invest in
And how by investing in different debt funds
How you diversify that Rs 70 investment
So I always say that diversification until one point is very good
But if you start diversifying a lot
And take exposure in any mutual fund just for diversification
Without thinking how much risk you're carrying
In that investment, then you make a very big mistake as an investor
Because of which your money has to suffer
And your overall portfolio also suffers and you don't get good returns
Like there is a category which we call sectoral mutual funds
And a lot of retail investors like you and me
Start investing in this category only for diversification
Without any further knowledge
So these sectoral funds, I will not say that they are very risky
But for those retail investors who don't have much knowledge about those particular sectors
For them, sectoral mutual funds become very risky
Because sectoral mutual funds track one particular sector
Consider that there is a fund that tracks the auto sector
And in the auto sector, there is a cyclicity
Which retail investors like you and I probably won't understand
So it is possible that we enter this sector at a very wrong time
And when it goes down, we get afraid
And we think we should exit this sector
And we come out with a loss because of which our overall portfolio also suffers
So if you're thinking of investing in this category
Or if you feel like investing here in the future
Then I will give you only suggestions that first you should research really well
And after doing your research, find out about this sector, in and out
And only after that take exposure in mutual funds related to this sector
Now you must be thinking that the categories that I told you, there are many categories after that
Where we can invest
That is also right, you can use those categories to diversify yourself
Like there is a very special category, index mutual funds
Index mutual funds are those that track a particular index
Then from the equity exposure if you want invest some shares in index mutual funds, then you can do that as well
But I always say that you should identify your risk first
So if you want to invest in index mutual fund, then you will first look at your portfolio
Like I told you, we will carry that example forward
That out of 100 you only want to put 100 in equity
So out of that 30 you will decide how much to put in index mutual fund
So that your overall portfolio remains managed
Your risk is optimised and you get moderate returns
So as an investor you should pay attention to how you should diversify while investing
And if I give you a number that you should invest only in five mutual funds
Then that is wrong
Because the number of mutual funds you should invest in
It depends on your risk profile and according to your risk
Which mutual fund is optimal for that
You should invest in that
That number can be three, five or ten
That is purely dependent on that individual, on that individual's risk
And in comparison to that individual's risk, how does that mutual fund perform
So always keep this concept in mind and this concept will make you return also good
And it will optimise your risk and reduce it as well
Happy investing!