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Tuesday, August 31, 2010

Diversification

Diversification is risk management technique which involves investment across a variety of asset classes.


The rationale behind diversification is to achieve higher return with minimum risk.

An ideal portfolio is the one, which judiciously invests across debt and equity instruments, according to the risk appetite and return expectations of the investor.

How much percent of the investable capital should be allocated in equity?

Thumb rule is-

(100-Investors age)% should be invested in the equity, and rest could be invested in debt and balanced instruments, with a maintaining a particular % of cash, to meet contingencies, in case they arise.

So a 40 years old person could invest 60% of his investable capital in equity instruments.


But one should not forget that this is a general rule, and one should invest according to his risk appetite and return expectations.

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