Significance of asset diversification and risk profiling in the rapidly changing investment culture | The Financial Express

Significance of asset diversification and risk profiling in the rapidly changing investment culture

In order to safeguard the investment and harvest maximum returns, you require to build a diversified portfolio in a proportion that suits your needs

Significance of asset diversification and risk profiling in the rapidly changing investment culture
Portfolio diversification is an easy way to wealth creation by increasing your returns over a period of time

By Deepak Singh

Information-driven smart investing has become a buzzword in today’s technology-led globalised world as all investors want to earn risk-free returns without making too much of an effort. A couple of decades ago, earning risk-free returns sounded impossible, but today information technology (IT) has made it possible. IT has brought the entire world on fingertips which helped you understand the happenings around the world before making smart decisions. Understanding stock or sector-specific developments along with allied businesses may, therefore, have a direct or indirect bearing on your profit earning.

Rising portfolio number

Over the last few decades, creating awareness through continuous educational content has increased investors’ confidence towards the stock market which is evident from a sharp increase in new enrolments. Markets regulator Sebi reported 2.2 times increase in new Demat account holders in the post-pandemic era.

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Sebi data showed the total number of Demat account holders were at 35.9 million, an increase of 3.9 million in the financial year 2018-19. During the financial year 2019-20, 5 million new accounts were added which took the tally to 40.9 million, followed by 14.2 million in FY 2020-21 to 55.1 million. In the years 2021-22, 34.6 million new accounts were opened taking the total tally to 89.7 million accounts. In Aug’22, total Demat accounts crossed the 100 million mark.

The AUM of the Indian MF Industry has grown from ₹ 7.30 trillion as on July 31, 2012, to ₹37.75 trillion as on July 31, 2022 more than 5 fold increase in a span of 10 years. The total number of accounts (or folios) as on July 31, 2022, stood at 13.56 crore (135.6 million).

Changing investment culture

There has been a complete transformation in the investment climate over the last few decades. In the fast growing social media era, individuals have started sharing information on every possible platform which gets transmitted in seconds to the entire world whether relevant investors or others.

Investors have now realised the lacunae of the social media platforms and started checking facts about the company and the sector, along with other allied businesses before taking final investment decisions. Since the regulator has made sharing of price sensitive information mandatory, smart decision making has become easier now than ever before when social media was not evolved. Hence, you must know your portfolio before making a financial planning decision.

Often decision-making based on public advice does not yield desired results. Hence, self-decision making comes to play a pivotal role. In fact, investors’ behaviour is changing with each passing day which is boosting confidence with understanding the underlying value of companies or the sector and then making choices, instead of directly vouching for a tip given via social media.

Plethora of opportunities

Globalisation has opened an ocean of opportunities for investors of which equities, indices, commodities, mutual funds, bonds, post office and bank deposits, and assets-linked investment schemes have become popular. Smart investors understand the instrument and assess the risk associated with them, explore alternative options, and compare returns before making a final decision, instead of jumping the bandwagon directly.

Asset diversification and risk profiling

In order to safeguard the investment and harvest maximum returns, you require to build a diversified portfolio in a proportion that suits your needs. A diversified portfolio distributes the asset-specific risk and helps you prepare to deal with it. In investment parlance, an underperformance of some stocks or asset classes due to any domestic or international issues always yields a surge in other ones. Thus, you can not only compensate the potential loss in one asset class with other ones, but also earn higher returns even in rough waters from a diversified portfolio. Hence, portfolio diversification helps you minimise the potential of loss and increase earnings in all market eventualities. Thus, portfolio diversification is an easy way to wealth creation by increasing your returns over a period of time.

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Conclusion

Earlier, there was a huge stigma around equity markets which prompted many investors to stay away from the risks and stick to the post office and fixed deposit schemes. These instruments eroded your capital post adjusting to the inflation. The perception, however, of not having exposure has changed now after a huge volume of content pushed on investor education. Now, investors are believing in a long term profit with risk profiling and a diversified investment portfolio.

(Deepak Singh is the Chief Business Officer at Reliance Securities. The views expressed in the article are of the author and do not reflect the official position or policy of FinancialExpress.com.)

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