Diversification: Best Game for Retail Investors

19 Dec 2023

Diversification: Best Game for Retail Investors

Thanks to diversification, retail investors can profit from any performing asset class or minimise losses.

Why has there been a surge in stock prices?

Only because of significant purchases made by Foreign Institutional Investors (FIIs) and some DII purchases have stock prices increased.

Companies such as banks, mutual funds, insurance providers, pension and provident funds, etc., are examples of DIIs. Retail investors give them a large portion of the money they invest.

This is a very good time for retail investors!

The levels of stock prices have never been higher. Small savings plans and bank fixed deposit interest rates are higher than inflation.

The US Federal Reserve stated at its most recent monetary policy meeting on December 12–13, 2024, that it anticipates the federal funds rate to reach 4.6% by the end of 2024 and then decline thereafter.

The rate at which US banks lend money to one another overnight is known as the federal funds rate. Right now, the rate is between 5.25 and 5.5%.

What effect does all of this have on the average Indian investor now?

The Fed attempts to signal the world that it anticipates a decline in US interest rates by projecting a lower funds rate. Large institutional investors will have reduced returns on their US fixed-income investments due to lower US rates. They will thus search the globe for larger rewards.

They invested Rs. 42,733 crores in purchasing Indian stocks between December 1 and December 15. This explains why, as of December 15th, the BSE Sensex, India's most well-known stock market indicator, had increased 6.7% since the end of November.

What about Bonds?

Bond yields are declining because a decrease in US interest rates is anticipated. The annual return that investors might anticipate if they purchase a bond and hold onto it until maturity is known as the yield on the bond at any given time.

Yields and prices are inversely correlated.

With bond yields falling, US bond prices have been increasing. This means higher returns for investors who have already invested in bonds or mutual funds that invest in bonds.

Again, what effect does all this have on the average Indian investor?

The Fed determines the course of international monetary policy. Therefore, it is now anticipated that the Reserve Bank of India (RBI) will also begin reducing interest rates, which will cause bond prices to rise and yields to decrease.

Diversification as a strategy

The best investment method is to diversify your holdings and not put all your eggs in one basket. This way, you can be sure that any asset class that performs well will benefit you as an investor.

Furthermore, the losses or lack of return from that asset class will probably continue to be restricted if things don't work out as planned.

Of course, investors who follow the diversification strategy and allocate a modest amount to a successful asset class will see lower returns than those who adopt a concentrated approach that places a significant amount of money on a single asset class. That is the cost of having diversity. Conversely, a focused investment approach may also result in losses if an asset's value declines.

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