Investments in equities are thought of as risky. This is simply because the equity investors are treated as owners of a corporation getting ownership in proportion of share held in the corporation. So, in case of liquidation, an equity investor will get revenue, if any, in proportion of shareholding only soon after all the liabilities are cleared. As a outcome, there is a threat of losing the complete capital invested in case of default.
So, as it is stated not to place all the eggs in the very same basket, as one rotten egg may possibly spoil all the eggs, it is also stated not to invest the complete revenue in the stocks of a single corporation, as in case of default, the investor may possibly shed the complete capital.
To minimise the threat, investors have to have to invest in distinct firms, so that even if one or two firms close down, revenue invested in other firms would continue to give returns.
However, investing in distinct very good firms in a diversified way does not make the investments in stocks steady, as apart from default threat, equity investments are also topic to market place dangers.
So, in spite of steady overall performance of the firms in which investments are made, the market place worth of the shares would fluctuate along with the fluctuation in equity markets.
Although the stock markets provide liquidity, permitting the investors to get and sell stocks freely in the course of market place hours, the market place volatility impacts the worth of the stocks, specially in the quick run.
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Higher the market place volatility, greater will be the fluctuations in stock rates and greater will be threat and chance to earn return.
“Risk diversification is the best way of migrating risks associated with market vagaries. Stocks perform on the basis of companies performance. Future prospects and sectoral outlook individual stocks react to market and Sensex differently,” stated S Ravi, Former Chairman of BSE and Founder & Managing Partner of Ravi Rajan & Co.
However, a effectively diversified investment portfolio may possibly absorb some volatility, as stocks of significant-cap, mid-cap and modest-cap firms may possibly fluctuate differently.
“From a investors perspective it is essential to mitigate the risk by investing in many stocks. Some company stocks tend to be volatile and some consistent. Investors generally buy shares which have a good track record for paying dividends,” stated Ravi.
So, greater diversification would assure greater portfolio stability.
“A portfolio of stocks is always a more prudent way of investing. Liquidity is another considering a basket of shares as liquidity in some investments may be an issue. A diversified portfolio is the best method of investment. Even fund managers of mutual funds follow the principal in order to overcome concentration risks. However it is important for any investor to buy shares to the extent they can closely monitor,” stated Ravi.
So, in case, it is come to be tough for a retail investor to invest and handle lots of stocks, it is greater to invest in a equity-oriented mutual fund (MF) with a effectively diversified portfolio to withstand market place volatility.