Diversification is important not only in individual investment planning but for corporate strategy as well. One of the keynotes of investment theory and financial economics is to opt for portfolio diversification that reduces the risk without any effect on returns. When a different types of securities are combined together into one investment portfolio the meager returns to a few are compensated by good returns to the others. It reduces the entire variability of the returns of the portfolio.
Today with the rapid growth in economy a number of people everyday find themselves with an income that is highly disposable. People normally want their money to be invested but at a lower risk. But there are a very few people who have idea on how to diversify their money in proper way. Like the way diversification is important for an individual, investment diversification for the small scale industries is also quite necessary it make their portfolios less risky and keep them protected from different issues.
The basic idea of diversification is related to diversifying a single portfolio with a number of investments. It helps to stay away from getting too much exposure to a particular source of risk. All the principles related to the portfolio are aimed towards realizing the diversification to reduce the chance of risk. Therefore, this quite important for both the individuals and small scale industries to diversify their investments.
A perfect diversification of investments normally takes minimum three factors which should be taken into account.
The choice of investment made by an individual or any small scale industry should be dependent to some extent on the time sphere. For example if the if the investor want to get the fund back within a year then he should invest the money in a short term policies.
The next two factors are complimentary to each other. Before investing the investors should decide the type of return they want after a particular period of time. Then after fixing the investment vehicle they need to consider the risk factors involved with the vehicle before finally investing the amount. This is quite an important step which facilitates us with lots of information related to the types of investment policies available in the market and helps us to choose the best suited policies for us.
The above mentioned ethics and principles are also applicable to various asset classes starting from bonds, stocks as well as options. The most important thing is to select the investment policy that you feel will be appropriate for you.
In corporate sectors the term diversification means the organizations that persuades many unlike lines to their business. GR, Textron and ITT are some of these companies which can be the best examples. There are a number of employees who do not even know what is the basic line of their business. A number of companies in 1960’s and 70’s followed the diversification strategies. Easy earning, lower risk factor, tax offset, are often considered as the best sources of financial gains thanks to the diversification.
There was a big question raised in the year 1980 by a number of corporate managers and financial economist regarding the value of the strategies related to corporate diversification. According to them, corporate diversification was actually helping the shareholders who can easily diversify their own portfolios in a very cheap manner. Apart from that corporate diversification somehow compelled the shareholders in accepting a particular combination of industry exposure even if it does not suit the return and risk profiles of every investor.
You should always keep in mind that you may diversify the risk that is related to the organization itself with the help of thorough research and proper diversification. But it may not be possible for you to diversify the risk which is related to some unpredictable and uncontrollable events outside the market.
About the Author:Jonny Pean is an experienced business writer. Writing regularly for blogs and websites, his work focuses on topics that address finance and economies. He is currently associated with easyfinance as their staff writer. Twitter, Facebook & Google+