Why do Investors need To Create Diversify Portfolio?

It is important for each investor to have a diversified stock portfolio because you do not know what risk is coming ahead. In financial markets, an investors success is based on how he creates a successful portfolio. Diversification is a strategy to maximize the return and minimize the risk. 

Let us take an example, you are keeping airline stocks if any bad news comes, like a long strike by employees that will cancel all flights, Then share prices will drop. But at the same time, if you are keeping railway stocks as well, your whole portfolio will not get affected. Also, there is a chance of getting good returns in railway stocks because people can search for alternate transportation. Because there is always a strong correlation between airlines and railways. But there is a risk involved, if there is a situation like covid 19 and all type of transportations stopped, both railways and airline stocks get affected. so you can even more diversify your portfolio by buying companies in different types of sectors.

Conservative investors portfolio looks like, they are putting 70 - 75 % amount in Risk-free returns like Fixed deposits and government bonds, Remaining they put in equities or they keep cash in hand. Moderately aggressive investors portfolio looks like, they are putting 30- 40% in Fixed deposits and 50% in equities and remaining cash in hands. The main thing is each person have individual financial commitments, according to that you can invest and diversify your portfolio. For years analysts are suggesting 60-40 portfolio, 60% capital in stocks and 40% capital in fixed deposit and Bonds. 

 If you are putting your whole savings money in Equities you need to buy stocks from different sectors. Don't put all your money in a single stock or single sector. Also, concentrate sectors like where demand is high. For example, FMCG is a consumer goods sector, consumer demand is always there, so this kind of companies will do well most of the time. There is also more demand for medicines so you can buy stocks from the pharma sector. If you don't have time to research stocks you can also invest in Index funds that gave annual returns 10% safely. 

 Analyze and classify the sectors which is close to the economy and invest in that companies. Don't buy too many companies over diversification is not necessary. Analyse the top two companies in each sector in which the sales are going good and debt is less and creates your portfolio of 10 good companies. Also, look into blue-chip companies in each sector. Blue-chip companies mean financially sound and very well known companies to everyone. They are safer for investments with a proven record each year. Example: Reliance, Tcs, Hul, Itc, Asian paints, Bharti airtel, HDFC. 

 If your favourite stocks are not doing well, and if you think they will do well in future you have the liberty to hold the stock, because of diversifying, your portfolio value will not fall fully.