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Diversification is one of the basic building blocks of an investment portfolio. In fact, diversification is the fancy name for the advice: "Don't put all of your eggs in one basket". This is the basic principle behind asset allocation, a key element of portfolio diversification. By diversifying (allocating) your investment across assets, you can reduce the overall risk of an investment portfolio.

A basic, diversified portfolio might include several investment categories such as stocks, bonds, commodities (for example: gold) and cash. Your allocation to each of these broad categories should be based upon your investment goals, your tolerance for risk, and your time horizon.

Stocks or shares are commonly known as equities. These are also widely seen as risky asset class, as stock prices are dynamic and fluctuate throughout a single trading day. There is no guarantee that you will get your initial inlay back.

Bonds fall between stocks and cash on the risk meter. The entities (for example the government or a company) that issue bonds promise to pay a certain coupon, which will give you a steady stream of income, and at the end of the tenure will pay you back your initial inlay.

The Gold price moves in a different way and for different reasons than stocks and bonds and for this reason offers diversification to an investment portfolio.

Cash is the least risky of the broad asset types, as the risk of not being able to get your money back from your bank (for example from your savings or checking account) is generally very low.

TIPS

  • By diversifying your investment across assets, you can reduce the overall risk of an investment portfolio.
  • Spreading your investments into different asset classes helps guarding against major losses
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Mutual fund investments are subject to market risks, read all scheme related documents carefully.