Importance of asset diversification and risk profiling in a rapidly changing investment culture

By Deepak Singh

Smart, information-driven investing has become a buzzword in today’s globalized, technology-dominated world, as all investors want to earn risk-free returns without putting in too much effort. A few decades ago, earning returns without risk seemed impossible, but today information technology (IT) has made it possible. IT has put the whole world at your fingertips which has helped you to understand the happenings in the world before making smart decisions. Understanding stock or sector specific developments as well as allied companies can therefore have a direct or indirect impact on your earnings.

Number of wallets on the rise

Over the past few decades, raising awareness through ongoing educational content has increased investor confidence in the stock market, resulting in a surge in new listings. Market regulator Sebi reported a 2.2x increase in new Demat account holders in the post-pandemic era.

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Data from Sebi showed that the total number of Demat account holders was 35.9 million, an increase of 3.9 million in the 2018-19 financial year. In fiscal year 2019-20, 5 million new accounts were added, bringing the total to 40.9 million, followed by 14.2 million in fiscal year 2020-21 to 55.1 million. During the years 2021-22, 34.6 million new accounts were opened, bringing the total to 89.7 million accounts. On August 22, the total Demat accounts crossed the 100 million mark.

Indian MF industry’s AUM increased from ₹7.30 trillion as of July 31, 2012 to ₹37.75 trillion as of July 31, 2022, more than 5 times increase over 10 year period . The total number of accounts (or folios) as of July 31, 2022 was 13.56 crores (135.6 million).

Changing the investment culture

There has been a complete transformation of the investment climate over the past few decades. In the era of fast growing social media, individuals have started sharing information on every possible platform which is transmitted within seconds to the whole world be it concerned investors or otherwise.

Investors have now realized the shortcomings of social media platforms and have started fact-checking the company and the sector, as well as other allied companies before making final investment decisions. Ever since the regulator made it mandatory to share sensitive price information, smart decision making has become easier than ever when social media hasn’t evolved. Therefore, you need to know your portfolio before making a financial planning decision.

Often, decision-making based on public opinion does not yield the desired results. Therefore, personal decision-making comes to play a central role. In fact, investor behavior changes with each passing day, which builds confidence by understanding the underlying value of companies or the industry and then making choices, instead of directly vouching for a tip given via social media.

Plethora of opportunities

Globalization has opened up an ocean of opportunities for investors among which stocks, indices, commodities, mutual funds, bonds, postal and bank deposits and asset-linked investment systems have become popular . Smart investors understand the instrument and assess the risk associated with it, explore alternative options and compare returns before making a final decision, instead of jumping straight on the bandwagon.

Asset diversification and risk profiling

In order to protect the investment and reap maximum returns, you should build a diversified portfolio in a proportion that meets your needs. A diversified portfolio spreads asset-specific risk and helps you prepare for it. In the language of investing, an underperformance of certain stocks or asset classes due to national or international problems always leads to an increase in others. So you can not only offset the potential loss of one asset class by others, but also achieve higher returns, even in choppy waters, from a diversified portfolio. Therefore, portfolio diversification helps you minimize the potential for loss and increase profits in all market eventualities. So, portfolio diversification is an easy way to build wealth by increasing your returns over a period of time.

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Conclusion

Previously, there was a huge stigma around stock markets, which caused many investors to stay away from risk and stick to post office and fixed deposit systems. These instruments have eroded your capital position by adjusting for inflation. The perception, however, of not having exposure has changed now after a huge volume of content pushed on investor education. Now, investors believe in long-term profit with a risk profile and a diversified investment portfolio.

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

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