Remember the old saying – “Don’t put all your eggs in one basket”? We bet you do. So what would happen if you put all your eggs in one basket? You risk losing all the eggs if that ‘one’ basket fell or is lost during transportation. Isn't it?. Had you distributed your eggs across many baskets, you would have been reasonably sure that most of the eggs would have remained safe, even if one or two baskets were lost. This is the basis of diversification. It’s a strategy that requires you to spread your money across various investments. This is to ensure that in case one of those investment loses money, the other ones will compensate for the losses of first one. It’s very important to understand that the real goal of diversification is not to increase your portfolio’s performance (though it actually can). It’s more about protecting your money against large losses due fall in prices of an asset, where your money was over-concentrated. Lets take an example...

An asset can either be physical (can be touched and used like gold, real estate), or it can be financial (can be bought in form of contractual certificates like stocks, deposits, bonds etc.)Within this categorization of physical and financial assets, there are few major types of assets: Stocks: Stocks are representative of part-ownership in the company whose stock is being bought. Out of the profit that the company makes, a part is paid out to shareholders (stock owner) as dividends. Rest of the money is invested back in the business. In general, company’s growth potential decides how the markets value the stock. So if the markets think that company will do well in future, its share prices might go up. So in addition to dividends, shareholders also earn money by means of capital appreciation when they sell shares held by them at higher prices. Unfortunately, stock prices don’t always move up in straight line, i.e. returns are not guaranteed. But on an average, stocks are known to provide the...

Stocks, bonds, real estate, gold and cash - there are the many asset classes that fight for a place in investors’ portfolio. Within this categorization of physical and financial assets, there are few major types of assets: But with so many available options, how should an investor decide which ones to choose and which ones to ignore? Or what percentage of the total portfolio should be parked in each of these assets? For an investor, this is one of the most important money-related decisions, which he/she needs to take. And this is what is popularly referred to as deciding the asset allocation. Having the right asset allocation helps earn better risk-adjusted returns at the overall portfolio level and also, reduce the overall risk and volatility. So what exactly is asset allocation? Asset allocation is the process of allocating your money into various asset classes. The primary goal is to have a well balanced portfolio, where fall in value of one asset is adequately compensated for by rise in another....

"Stocks are risky. Bank deposits are safe. Don't buy stocks! Keep your money safe." Haven't you heard such statements before? We are sure you have. But before you decide to accept these statements on their face value, we suggest you understand the real relationship between risk and returns. To start with have a look at the average historical returns given by these 2 assets, i.e. stocks and bank deposits: One glance at the table above and it becomes clear - which is the better asset to invest in,given the historical average returns. Another thing to note here is that returns given by bank deposits will be further reduced when we consider taxes.This makes stocks all the more better option for long-term investing. But unfortunately, stocks don’t go up in straight lines. Stocks are volatile and can move up or down sharply. This is unlike bank deposits, which are almost guaranteed to give fixed returns promised at the time of booking the deposits. But before you draw a negative conclusion...

In last few articles, we have covered topics ranging from the need for investing, diversification to importance of asset allocation. In this article, we look at two different styles of investing. Investing is the process of putting aside money in a chosen asset class today, in order to get ‘more’ money in future.Even though the goal of every investing exercise is similar, i.e. to achieve higher returns, the process/style of achieving it can be different. There are two important styles of investing: 1)Active Investing 2)Passive Investing Lets discuss these two styles in detail. Active Investing The whole purpose of active investing is to try and outperform the broader markets.To illustrate, you pick stocks on your own, you are investing actively. Since the idea of investing on your own is to get higher returns than broader markets, you would try to generate returns that are able to beat the returns given by broader market indicators like Sensex, Nifty 50, etc. It requires one to analyse companies, buy and sell shares,...