The Process of Diversification of Investment Portfolio

The process of diversification of investment portfolio has various phases involving investment into various classes of assets like equity shares, preference shares, money market instruments like commercial paper, inter-corporate investments, certificate of deposits etc. Within each class of assets, there is further possibility of diversification into various industries, different companies etc. The proportion of funds invested into various classes of assets, instruments, industries and companies would depend upon the objectives of investor, under portfolio management and his asset preferences, income and asset requirements.

A portfolio with the objective of regular income would invest a proportion of funds in bonds, debentures and fixed deposits. For such investment, duration of the life of the bond/debenture, quality of the asset as judged by the credit rating and the expected yield are the relevant variables.

Bond market is not well developed in India but debentures, partly or fully convertible into equity are in good demand both from individuals and mutual funds. The portfolio manager has to use his analytical power and discretion to choose the right debentures with the required duration, yield and quality. The duration and immunization of expected inflows of funds to the required quantum of funds have to be well planned by the portfolio manager. Research and high degree of analytical power in investment management and bond portfolio management are necessary.

The bond investment are thus equally challenging as equities investment and more so in respect of money market instruments. All these facts bring out clearly the needed analytical powers and expertise of portfolio manager.