Importance of diversification in stocks

June 12, 2012

We hear a lot about diversification in stock market but what does it mean? It means basically to spread your investing amount into various stocks or commodities in order to achieve at least average returns. Diversification is used by all the big trading firms but it becomes all the more important for a person who puts money into market on an investment basis and not for trading for few days because he will expect his savings to come back with some add on.

So where does one begin on how much to invest in a particular stock or stock market. The general thumb rule is that the percentage of investment in stock market should be

Percentage of investment = 100- age

This means that as the age increases the value of investment should reduce accordingly. This rule has become more important because of the increased volatility in the stock market. The above decree is applicable only during the initial investment stage. Another point is that your investment should not be proscribed to stocks. You can pool in money to mutual funds as well in SIP( systematic investment plan) or lump sum way.

One advantage of mutual fund is that the fund manager takes care of investment, but this comes at a cost of which they charge for maintenance. You should pay heed to the type of mutual fund because different types of investment have different objectives and sectors. About 10% of investment go into gold and silver since they are considered as safe havens of investments. At any point it should not exceed 15% of the value. Buying gold can be made cheap if it is restricted in the form ETFs or mutual funds. These tried and tested rules have benefited many investors who have kept long term holistic view.

Editor: Pakshaal S.Shah

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