Today we will learn the concept of diversification in mutual funds

There are many risks in stock markets — a few of them are

1. Liquidity risk

2. Credit risk

3. Default risk

4. Interest rate or Re-investment risk

5. Inflation risk

6. Concentration risk

Concentration is when most of your money is in 2 or 3 stocks. And if something happens to those stocks — you lose your savings.

The general expectation is that — the public is terrible at stock picking. Hence the fund managers have brought about a solution called Diversification.

Diversification is where you spread your money into many different sectors. In case something happens to a few stocks, the other ones will continue to give you good returns.

Hence the concept of Index. In our case, Nifty50 is an index of 50 companies. The diversification is measured by a variable called beta and its value = 1 for Nifty50.

If our portfolio gives a return of 1.5x when N50 moves 1x — then it’s beta =1.5.