A rising number of Indian investors are under the misconception that holding a variety of financial products safeguards them against market fluctuations. However, financial advisors caution that mere possession of different assets does not equate to genuine diversification.
Illustrating this point, CA Abhishek Walia, co-founder of Zactor Money, recently shared a case that highlights the presence of overlooked risks.
In a recent scenario, a client approached Walia, believing her investment portfolio to be well-diversified. Her holdings encompassed mutual funds, direct stocks, cryptocurrency, real estate, and gold—a mix typically indicative of diversified investments. Yet, there was a significant flaw.
Walia pointed out that “70% of her investments were exposed to the same risk: Indian equity.” In essence, if the Indian stock market experienced a sharp decline, a large portion of her investments would suffer a similar fate.
The key lesson emphasized by Walia is that diversification is not solely about the quantity of assets but rather how distinctively each asset behaves in varying market conditions. Merely accumulating products does not guarantee protection if all assets are impacted by the same market trend.
To rectify the situation, Walia restructured the portfolio by allocating investments across assets with non-correlated movements. This involved incorporating global exposure, debt instruments, and other options to mitigate the risks associated with an equity-heavy portfolio.
Following these adjustments, immediate positive effects were observed. The client experienced more stable returns, reduced volatility anxiety, and a newfound appreciation for the role of strategic portfolio engineering in achieving stability.
In conclusion, true diversification hinges on the unique behavior of each asset in response to market dynamics. Walia aptly summarized by stating, “Diversification is not about quantity but about uncorrelated outcomes.”