“Don’t put all your eggs in a basket”
I think we all have heard this popular sentence many times in our lives. And this is an eye-opener. It reminds us of the benefits of diversifying our investments.
All the successful people follow it. If you look up the portfolios of well-known and highly successful investors, like Rakesh Jhunjhunwala, Vijay Kedia, Ashish Kacholia or even legendary investor Warren Buffet then you will see they don’t have investment in a single stock. They all have diversified their investments and reduced the risk of potential losses.
Warren Buffet has invested in over 40 stocks. Similarly, Rakesh Jhunjhunwala had made investments in over 25 stocks. This is because the stock market rewards those who have patience and work out well before buying any stock. But, sometimes all the workouts and things just go against the plan. And in that condition, diversification protects us.
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Even companies follow the same rule. They diversify their product portfolios. For example, Apple does not sell only iPhones but it has many more products like watches, iPads etc. What if Apple Inc was selling only iPhones, it could not have $391 billion in revenue.
Mutual funds also work on the same principle, they don't have only a few stocks but dozens of stocks in different sectors. For example, HDFC's Top 100 fund has 36587 crore rupees of AUM, and it has invested in over 45 stocks in 10 different sectors and none of the stocks owns more than 10% of AUM. Not only HDFC Top 100 fund, but all other funds have invested their AUMs on the same principal.
So, diversify your investments in different asset classes. So, if something does not work even after a careful workout, you do not panic. Doesn't it make sense?