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Expert discusses how proper diversification is key to protecting wealth, particularly during uncertain times.
SIPs offer flexibility and gradual capital buildup, ideal for new investors.
Authored by Harsh Gahlaut, Co- founder & CEO, FinEdge: Diversification is a word often thrown around loosely, frequently misused to push products or justify poor investing behaviour. But when applied with clarity and purpose, it’s one of the most powerful tools for safeguarding wealth, especially in uncertain times. The key lies in understanding its role, not as a cure-all, but as a calibrated strategy to manage risk without compromising on goal achievement.
To approach diversification meaningfully, start with three essential questions:
- Am I in wealth creation mode or wealth preservation mode?
- Have I clearly defined and prioritised my financial goals?
- Is my objective to take informed risk, not just avoid it?
Only once these are answered can one truly begin to think about diversification, because without clarity on your goals and timeline, diversification becomes either a shot in the dark or a response to fear and market noise.
The Many Faces of Diversification
Diversification can have different meanings for different people; it is not one-size-fits-all. It can be based on liquidity, asset class risk, or sovereign risk, and its purpose varies depending on your stage in the wealth journey and the time horizon to your goals.
If you’re in wealth creation mode, such as investing in equity mutual funds through SIPs for a retirement goal 15–20 years away, your diversification decisions will focus on aligning the right mix of market capitalisations — say, between large, mid and small-cap funds. You’re not diversifying for liquidity here; you’re optimising your return profile within the same asset class while managing volatility across cycles.
What should be avoided at this stage is the temptation to dilute risk through excessive allocation to low-return asset classes. A seemingly minor difference in return can dramatically affect your goal achievement. For instance, over 20 years, a SIP of ₹20,000 per month at 9% CAGR yields approximately ₹1.36 crore, whereas at 14%, it grows to around ₹2.63 crore. That’s nearly double and a direct consequence of taking informed risk instead of over-diversifying out of fear.
Diversification for Preservation: The ‘What If’ Lens
If you’re in preservation mode, having already built your corpus, diversification takes on a different role. Here, the objective shifts from maximising returns to ensuring that inflation-adjusted, post-tax returns are sustained. The focus now is on what-if scenarios, protecting the portfolio from downside risks across liquidity events, credit quality, and sovereign exposure. In this phase, asset allocation across debt, equity, gold, and other instruments needs to be thoughtful and purposeful, not reactive.
When Diversification Becomes a Liability
Over-diversification is just as dangerous as no diversification. Often driven by excessive fear, greed, or a sales-driven narrative, it creates clutter in the portfolio and confusion in the mind. Without a clear ‘why,’ the ‘how’ and ‘where’ of diversification become arbitrary. I’ve seen investors with 15–20 mutual fund schemes and constant churning, thinking they’re being smart. Ironically, this behaviour leads to the ‘returns gap’ — the phenomenon where investors earn far less than the funds they’ve invested in, purely because of poor investing behaviour.
Final Thought
There is no substitute for clarity of purpose. Diversification should follow a well-defined investing roadmap, not precede it. Used right, it cushions you during uncertainty. Used wrong, it blurs your focus and delays your goals.
Diversification isn’t just about products — it’s about behaviour, process, and resilience.
As with most things in investing, it’s not about doing more — it’s about doing what’s right, consistently.
The bottom line: Diversification is A Tool for Reducing Risk, Not Diluting Purpose
It is authored by Harsh Gahlaut, Co- founder & CEO, FinEdge
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