Portfolio Diversification | Importance of Portfolio Diversification

An Investor wants to invest his hard earned money to those sources, which could generate them maximum return. In the time of Bull Run in the stock market, stocks give higher return otherwise it could also give you no income or a big loss. To escape from this condition Portfolio Diversification between equity and bond funds is very required.

Equity funds give the benefit through capital gain where as regular fixed income comes from the bond funds. Bonds are also safer than equity funds. In this way, we can reduce our losses by investing our hard earned money in both equity and bonds, in case of any downbeat development comes within these markets. The bond and equity market do not always perform in the same cycle. Sometimes when stock market goes down, the bond market can restrict the losses of your portfolio.

Difference between Equity and Bond funds

Equity Funds

Bond Funds

Equity funds provide long term growth. It provides regular and stable income.
This market is good for risk takers It is good for risk averse investors.
Invest in stock market. Invest in Government Securities, Bank FDs , Commercial Papers etc.
It requires long term horizon. It requires short term horizon.

Portfolio Diversification totally depends upon the risk taking ability of the investors. Investors who want to live on the interest of their investments allocate greater part of their portfolio assets to bond investments so that they could receive fixed interest payments whereas investors who do not need to live on the income from their capital gains and have a long time horizon can allocate a greater percentage towards stocks.