ASSET ALLOCATION AND DIVERSIFICATION

 

When we discuss about investment we basically think about return of a particular investment. But in every investment decision we should not consider only return because return actually depends on two more things one is asset allocation and diversification. Everyone who wants to develop their portfolio should seriously consider these two things. So to enhance the overall return of a portfolio one should understand the significance of asset allocation and diversification. Asset allocation means a practice allocating one’s money into different asset classes those are not interrelated such as equity,debt,real estate and commodities etc. Here not interrelated means asset classes are not react in same manner if we more simplify this that when equity market is more volatile at that time debt will give you stability and gold will give you higher return in this way overall return of a portfolio is maintained. Now second thing is diversification. Some time we confused diversification with asset allocation but this two things is different. Diversification means diversify one’s money into different categories of a particular asset class. For example one decide to invest in equity now he should diversify his investment amount in different categories according to his risk profile such as large cape, mid cap and small cap if someone want to take more risk he can add thematic or sectoral fund also. So we can say diversification means allocation of fund into different categories of a particular asset class.

So without proper understanding asset allocation and diversification no one can manage his/her investment.