What is diversification of funds and its functions
For any business model, even one that is successful and working, there is a risk of loss due to changing circumstances. To avoid such a situation, it is important to adjust the strategy in time and allocate assets correctly. Diversification of funds is an effective technique. It is an investment in different types of assets in order to minimize possible losses and not to reduce the profitability of the portfolio.
Diversification allows you to survive temporary difficulties in one business segment, blocking losses with funds from other areas. This approach is important in case of production activities. Here it is difficult without large investments to significantly expand the range of the company, and not always the approach will be appropriate. The principle of diversification of production becomes clear when analyzing the work of the Ceska Zbrojovka concern in the Czech Republic. Its main specialization was the production of weapons, but in order to master new products, the company began to produce parts for cars and the aviation industry. Having developed its own production technologies on the existing equipment, the concern used the method of horizontal diversification. At the same time, this approach is applicable not only for large businesses and allows you to choose different instruments. But before introducing the technique, one should think over where to invest and in what quantities. A clear definition of the financial target will help.
Diversification is not the only way to protect assets from losses. An alternative is to expand the services provided. For example, companies that sell certain goods or real estate can expand their sphere by taking care of insurance. For this purpose, they have the material and technical base and personnel.
In case of diversification of sales markets it may be necessary to upgrade production facilities to meet the necessary standards. In addition, it may be necessary to obtain a license and develop a legal framework. But despite the additional actions, the goal remains unchanged – to reduce the risk of losses in one segment of the business, compensating their income from alternative destinations.
Diversification of funds in investment sphere
Diversification is also relevant for investors. When investing in shares or securities, part of the funds is allocated to other assets – gold, currency, real estate or raw materials. In this way, the investment portfolio will consist of safe and risky instruments. But here it is important to understand that the directions should be different. Pay attention to three components – risk, correlation and return. When using diversification techniques, the correlation indicator should be negative or close to zero. The optimal option is to select assets with a long-term perspective without correlation of the financial flow in a short period.
It should be understood that diversification of funds implies reduction of risks, but without changing the general indicators of income. This method allows one to have a stable profit from one business line, thus compensating for losses, if the efficiency of one business line decreases.