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Here's why you must diversify your portfolio to earn attractive returns.

They say, “Don’t put all your eggs in one basket,” for a reason!

Investing all your hard-earned money in one market or asset class can be very risky and offer limited growth. In contrast, diversification reduces risk by creating a heterogeneous portfolio with financial instruments from different geographies and asset classes. The technique aims to maximize returns by investing in assets that react differently to the same uncertain event.

For example, if inflation shows a trend of steady rising, interest rates are likely to follow - this event will favorably impact new bond issuances, attracting money from equity markets, thus adversely impacting equity markets. If you have both bonds and equities in your portfolio which are in turn actively monitored and managed, the same event will protect your portfolio value, as compared to the drop in value you may experience if you hold only equities, or only bonds, in your portfolio.

Diverse investments reap more returns and reduce risks compared to concentrated portfolios. However, only a few investors know about the actual impact of diversification.

Read on to get a deeper understanding of how a diverse portfolio behaves and responds to the market.

Leverage global opportunities to earn delta returns

When you diversify your portfolio across countries, you get to take advantage of how the investment index of that particular country flows. For example, the Indian Index has a stronger tilt towards traditional industries rather than innovative companies. Whereas some western countries often sway towards disruptive technologies.

Furthermore, factors that influence the returns may not always depend on the market fluctuations but also on the culture and advancement priorities.

Hence, diverse global funds are not completely dependent on one market or its fluctuations. They help you earn higher returns from factors beyond traditional market movements.

Without diversifying your investments, you pay the opportunity cost of a non-diversified portfolio. Different growth cycles often do not benefit you and require you to depend on static or repetitive market movements to earn returns. In the absence of this, you often lose money.

Manage risk and reduce volatility

A diversified portfolio is less risky than a concentrated portfolio. They tend to be far less

volatile because they are dependent on the complementarity of different asset classes. This concept works by taking two or more assets that move in opposite directions in specific environments.

During market downturns, a well-diversified portfolio can absorb the shocks. Global diversification often is one of the strongest shields against market downturns. The risk is well-spread across different asset classes and also across different geographies.

Let’s take for instance, the US and Indian markets. The standard deviation for the Indian Index is higher vs. the US: <1% over 3 years; 3% over ten years; coupled with FX benefit of 5.07% over the last five years