The essence of diversification is to ensure incomes or rate of return in all weather conditions. In this sense, what possible ways exist for one to achieve full diversification?
In the current indian markets, you have mostly the following opportunities for ensuring diversification all the time.
- Sector Rotation : a). Economy sectors like Pharma, Banking, Media,etc..
b). Private Sector & Public Sector
c). Geographical segments like Domestic, China, Asia, USA and latin american regions
2. Contra
3. Dividend Yield & Price Earnings
4. Market Capitalisation: Large cap, Midcap and Small cap
5. Indexing
6. Basic Strategy : Growth-Value-Income spheres and
7. Asset Class based: Equity, Debt, Money Market, Gold, Realty etc..
The next part of the investment decision will be about the money you are willing to invest.
An average indian may be able to start with the last item.. ie.. the asset class diversification. This is the premitive strategy of all.
If you want to go to the next level of 'Growth-Value-income' you will need some more money at disposal. Growth happens over aperiod of time. Value realisation also happens after some time & upon happening of an expected event. Income you need for survival. Imagine all your investments are only in these three classes of assets.
Now the indexing level of diversification: This is based on the three dimensional capital market model of efficient market hypothesis. Since no one can beat the market, you do not go for great research but join the party with some index fund. Index reflects the market performance. Now if you want to have same level of income or rate of return, you may have to make an allocation more than that you have allocated to the Diversification Strategy No:6 or 7
When you want across market capitalisation also you need very substantial funds to keep you at the same level of income or rateof return than what it took eralier cases.
Look at the No: 2 contra: It requires lot of research to zoom in on possible up segments and take positions early with substantial funds to generate a given level of income or rate of return
What if you go for sector Rotation? You have seral alternatives available here. So to have Full divesification you ned substantial funds in each segment. When certain segments perform, other fail.
Thus progressively proceeding from Strategy 7 to 1 You will find that you have an inverted triangle of investible funds to sit with depending upon what investmenmt strategy in diversification you want to follow. So choose a diversification level that goes with your fund capacity, your knowledge level and above all what is its fit with your own life need?
Happy investing
