Portfolio diversification for domestic retail investors

Abstract

Diversification 1s a technique that allows investors to reduce the unsystematic risk by allocating their funds across different financial instruments from various sectors and industries. Portfolio diversification is critical for investors to hedge their risk and the way to allocate funds to various stocks is estimated in this report. Physical assets form 95% of Indian investment, which is illiquid as in case of real estate. An average household holds only 5% in financial assets, which includes deposits and saving accounts too. If middle third of gold holding households re-allocate a quarter of their existing gold holdings to financial assets, their wealth gain in real present value terms accruing would move these households | percentage point up the current Indian wealth distribution. So, most investors lack knowledge of other financial instruments and asset classes they can invest in to make their portfolio more robust and resistant to changes in the economy. In the bonds market, investors are more aware of Government bonds but lack of liquidity, information asymmetry, and inability to directly invest are some of the reasons why corporate bonds have very few retail takers in India. Even though the Indian capital market has been around for some time, the corporate bond market 1s still poorly developed in India. There are other routes through which retail investors can invest in corporate bonds such as mutual funds. Finally, subscribers are also not clear as to what is the optimal holding period for the different financial instruments. Some instruments like Gold bonds have an inherent holding period whereas instruments like traditional equity stocks and mutual funds can be traded easily with a minimal exit load. Investors also need to be aware of the dynamic aspect of investment to ensure they reap maximum returns.