How Diversification can lower your risk | Mutual funds for beginners - YouTube

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!