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Last Updated : Apr 12, 2019 09:00 AM IST | Source: Moneycontrol.com

Viewpoint | ‘MahaGathbandhan’ or ‘Single Party’? Diversification or concentration?

For the ‘Single Party’ believer, there is always a bias towards a particular asset class and their so called ‘evolvement and diversification’ happens in that one asset class itself

Kalpesh Ashar

Kalpesh Ashar

It's election time and the words ‘MahaGathbandhan’ or ‘Single Party’ are heard and debated everywhere. Everyone seems to have a strong view on  pros and cons of a methodology that seems to be beneficial to them in the political context. Relax, before you get excited to read any political undertones in this article, let me tell you that this is not the topic we will be discussing or debating here.

What’s surprising is when these two words are used as an analogy in the context of investment behaviour highlighting the merits of diversification (MahaGathbandhan – Alliance of various parties) vis-à-vis merits of concentration (Single Party) in an investment portfolio, they do tend to throw a lot of interesting facts which carry a lot of substance.

Reams of print have been dedicated on the virtues of diversification in an investment portfolio. This has been the most commonly used and accepted process. Various financial products are brought together and each of them have their own features. It is not necessary that each one is a sure shot alpha generator with high risk or a secure product with low risk. It is the coming together of all these products in varied proportions that we term as diversification from the perspective of a financially savvy individual or an evolved investor.

What is more interesting, and intriguing is when we explore this aspect from the other end of the spectrum i.e. from the viewpoint of a layman or an uninformed investor (unfortunately this class of investors form a ‘majority’).

For them diversification has a different meaning. Their portfolio could have a mix of real estate, gold and large unutilized sums in their bank savings account. They strongly believe that there is assured growth only in real estate, gold is their fixed income component and the balance in the savings bank account is their expense-cum-emergency fund.

There is no trace of equity investments (for them, the stock market is all about speculation, mutual funds are risky products and so on) and in debt investments they may at most have a public provident fund (PPF) and a small amount in bank fixed deposit.

For the ‘Single Party’ believer, there is always a bias towards a particular asset class and their so called ‘evolvement and diversification’ happens in that one asset class itself. They may have investments only in real estate and proudly proclaim that they are diversified across residential, property, commercial property and plots. The same applies to the investor’s eternal love of the ‘yellow metal where the holding is initially in jewellery, bars, coins and when they ‘evolve’ they start investing in Gold ETFs!

The third and the most prolific one is the ‘Insurance cum Investment portfolio Diversification’ where the insurance policy holders who believe they are ‘Investors’ have traditional endowment policies, whole life policies, money back policies and ULIPs in their portfolio. The only policy missing in their portfolio is a pure term plan (who needs it anyways!).

This is where the dichotomy steps in and the complex financial behavior of an investor surfaces.

The ‘Single Party’ (single asset class investor) has unknowingly (or should we say knowingly?) also created a ‘Mahagathbandhan’ portfolio within itself. There is surely a dash of diversification, but in their preferred asset class itself. For them the virtues and immense benefits of true portfolio diversification / asset allocation with financial assets and more importantly linked to financial goals are not evident at all.

This type of investment bias emanates from their firmly entrenched family belief systems or their half - baked bitter experiences with the financial assets earlier. Ignorance to understand these financial assets is also a major negative factor.

Moving on to the Do-It-Yourself (DIY) type ‘financially savvy investors’ who believe in the concept of diversification also err in their thought process. Many end up allocating a higher percentage of a particular asset towards their favored category or towards the flavor of the season products. Their investments are not linked to their financial goals and the concept of rebalancing the portfolio at the right time are the two crucial missing factors seen here.

This ironical yet realistic investment behavior is seen and experienced by us all the time and I am not advocating which method is correct. To sum it up, all I can say is that when we err as individuals in our financial behavior our personal investment profile suffers.

(The author is founder of Full Circle Financial Planners and Advisors.)
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First Published on Apr 12, 2019 09:00 am
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