Understanding diversification ...

Mutual fund companies highlight the benefit of diversification. What exactly is it and how does it help one? Let us understand the meaning, benefits and limitations of diversification here ...

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Read the English translation below:

Understanding diversification

Mutual fund companies highlight the benefit of diversification. What exactly is it and how does it help one?

When we invest our money in any investment, there is a lot of work required to study and analyse the same. However, there is still a risk of one’s judgment being wrong. There is a protection available against such errors of judgment. Invest across different companies representing different industries. However, do so only after identifying good companies. This would ensure that even if your judgment is wrong in a few cases, or if things do not turn out as expected, at least some part of your investment portfolio will not disappoint you.

In reality, a well-diversified portfolio tends to protect downside even while allowing one to participate in good part of the upside.

Is there any downside to diversification?

While diversification protects the portfolio from complete erosion, there would always be some part of the same portfolio that would outperform the whole. So if you are stickler for best performance, you are likely to be disappointed, as the whole portfolio cannot beat every single component of itself.

What care should one take while diversifying?

While comparison between the portfolio and one part of the same may make the portfolio look underperforming, it is unfair to do such a comparison. If we go back to the opening paragraph, we discussed that the purpose of diversification is to protect oneself against any unexpected, negative outcome. This means, if no part of your portfolio is delivering a disappointing performance, it is not properly diversified. Imagine, if all the components of your portfolio were rising in value simultaneously, what would happen if the present situation reverses? There is a possibility that in such a situation, the entire portfolio would witness a drastic fall in market value.

The key is to invest across companies, across industries, across asset categories and across geographies. In such a case, the portfolio is most likely to exhibit smooth performance, but as we have already mentioned earlier, it would underperform some part of the market.

- Amit Trivedi

Interest rates are falling ...

Interest rates are coming down. What should one do?

This has been a common question in various forums these days. As we all know, in the calendar year 2017, the interest rates have come down by a good number. Bank deposits offer lower rates as compared to last year. Even there are discussions regarding reduction in the interest paid on the savings bank account...

Click on the link below to read the article:

Interest rates are coming down. What should one do?

Equity investments simplified

Click on the link here to read the transcript of my chat on www.moneycontrol.com today

So you haven't received the dividend from your mutual fund?

What happens to the mutual fund dividend that you have not received? Is it possible to get it back even aft6er years have passed? What care should you take to ensure you do not miss out on receiving these payments? Read my article in  Gujarati edition of today's Mid-day to get the answers to these questions.

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The English translation of the article is as under:

What if you did not get your mutual fund dividend?

“I invested in a mutual fund scheme that declared dividend some years ago. I did not get the dividend cheque. May be it was lost in transit. Will I lose that amount? Can I ever get it back?”

Well, as per the process, unclaimed dividends are deposited in an account with Investor Education and Protection Fund (IEPF). However, such transfer of funds happens only after such dividends remain unclaimed for seven years. The logic behind this was simple. If someone has not claimed the dividend for such a long period, there is a very high probability that the claim would never come.

One is not sure, but the logic used here could be in alignment with another law that states that any person missing for more than seven years is declared dead. This was required especially with respect to the distribution of that person’s wealth among the legal heirs.

The dividend rule also could have used the same time period for the purpose of depositing the unclaimed amounts in the IEPF.

However, there is an angle that is often missed out – human behavior. Some of the dividends may not be claimed for long periods purely due to lethargy. What if after a long gap someone realizes that one had not claimed the dividend?

In order to take care of such cases, the Government of India has changed a rule related to the unclaimed dividends. Even after this seven year period is over, one can claim the dividend back from the IEPF. In other terms, with one change in the regulation, the Government has taken a huge step in favour of the investor.

Having said that, it is also the investor’s responsibility to keep track of one’s own hard-earned money. Whether there is a facility to recover the money or not, being unaware of dividends for as long as seven years is not financial prudence.

So what should one do? First of all, one must review the investments on a regular basis – at least once a year. Second, please opt for electronic transfer of all the dividends into your bank accounts. In this way, you would be able to get rid of remembering whether you have received a cheque, deposited it in the bank, whether the cheque validity is over, etc. opting for electronic transfer of funds also removes various other risks related to paper movements, e.g. torn cheques, mutilated cheques, loss of cheque in transit, etc.

So, be careful with your money and take a few small but very important steps.