The economic era continues to develop, therefore companies must also keep following the development of market demand. Not only business actors, for those of you engaged in the investment world, you certainly need to think of the right strategy so that your funds can grow many times over. One strategy often used to suppress investment loss risks is diversification.
If interpreted simply, diversification is diversity. However, when applied in financial terms, diversification means distribution. Distribution means efforts to avoid dependence on a product, asset, or in this case investment. Investors usually spread their investment funds so they do not accumulate in one asset to minimize loss risks.
On this occasion, we will discuss further about the importance of diversification in minimizing investment loss risks. Come on, read until the end.
Key Takeaways:
- Diversification is diversity. In investment, diversification strategy means distributing investment funds to various investment instruments.
- The main purpose and benefit obtained from diversification is to minimize losses that will be obtained, both in business ventures and investments.
- In general, types of diversification are divided into two, namely vertical and horizontal diversification.
Definition of Diversification
Quoted from Cermati, the definition of diversification according to the Great Dictionary of Indonesian Language (KBBI) is diversification. However, in the investment world diversification is a strategy in placing assets in an investment portfolio. Just like business diversification, investment diversification also aims to minimize risk by combining various types of appropriate investment instruments for your portfolio.
By doing diversification, it means you as an investor have bought different investment instruments to reduce the risk of investment failure if the performance of one investment instrument is not good. Usually this diversification strategy is done in mutual fund investments which contain various types of investment instruments, or stock investments that relatively have high risks.
What Are the Purposes and Benefits of Doing Diversification in Investment?
Diversification is one of the powerful strategies in investing. Based on Cermati, the following are the purposes of diversification along with the benefits that will be obtained.
- Minimize Loss Risks
By using many investment instruments as a place to put money, the risk of loss will be smaller. Because if there is one investment instrument that has problems, you still have other instrument options that can help minimize these risks.
- Help Find Suitable and Successful Investment Strategies
By doing diversification, you as an investor can continue to learn and experiment to divide investment fund portions to various appropriate investment instruments according to needs and market conditions at that time. Certainly when you want to find a suitable investment strategy, you need to consider personal risk profile, risk level of each investment instrument, as well as the purpose and investment period to be conducted. This can be done so you can find a suitable investment strategy and can offer maximum profits with minimal loss risks.
- Increase Profits in Investing
This point is actually related to the previous point, by choosing the right investment instrument, you can maximize the profits obtained from various selected investment instruments. However, before you choose an investment instrument, make sure to choose instruments that offer the most maximum profits according to your investment goals and period.
- Reduce Dependence on One Type of Instrument
If you invest in many instruments, of course you will not have dependence on one of those instruments. The many investment instruments increase different profits and risks, so if you do it correctly then you can find profit potential in other investment instruments that can optimize profits in the portfolio without having to depend on one of them.
- Add Investment Knowledge and Science
Referring to the previous points, by doing diversification means you will be more understanding and experienced in managing investment funds in the portfolio. This ability will later enable you to make wise investment decisions that make your investment portfolio will get big profits with risks that can be tolerated.
Forms and Types of Diversification
There are several forms and types of diversification used by companies and investors. Before discussing further, you need to know about two general types of diversification that are usually used, namely vertical and horizontal diversification. Quoted from Lifepal, the following is the explanation.
- Vertical diversification, showing from top to bottom. For example, there is a cattle farm company, they not only sell beef but can develop their business to more specific products, such as cowhide production which then becomes material to produce shoes.
- Horizontal diversification, indicating diversification made by dividing the business to the side. For example, like a cowhide company that will produce shoes, bags, and belts. The products made from cowhide raw materials will later be called horizontal diversification products.
In addition to these general types of diversification, there are also three types of general application of diversification strategies carried out by entrepreneurs or investors. The following is the explanation below.
Portfolio Diversification
This type of diversification is usually done by investors by investing their owned funds into various investment products. Tips for doing portfolio diversification are:
- Understand risk tolerance, which is the limit of loss risk you can accept.
- Must determine the target assets ready to be invested.
- Focus on long-term financial goals to avoid volatile nature and easily tempted by market conditions when there is profit potential.
Conglomerate Diversification
The characteristic of this conglomerate diversification is the addition of new products marketed to new consumer targets not related to the current ones. To run effectively, there are several reasons why this strategy is applied:
- There is a decrease in sales resulting in decreased profits.
- Managerial capability and capital to compete in new industries.
- There is synergy in the financial sector between two or more companies with reasons that the market is saturated with products currently in the market.
- Opportunities to acquire new businesses not related to previous businesses but still have positive investment potential.
- There is distrust of the business currently being run.
Examples of this business diversification are the Johnny Andrean Group company which is famous for its salon business now venturing into the culinary sector, namely J.CO Donuts & Coffee. Another example is PT Wings which previously sold soap products now venturing into culinary with instant noodle products, soy sauce, and others.
Concentric Diversification
Concentric diversification means the addition of new products that are still related in terms of technology, shared facilities, or the same marketing network as current products. The concentric diversification strategy will succeed if:
- Competing in industries whose growth is not significant.
- Increasing sales of existing products by producing new products related to previous products.
- Offering affordable and competitive new product prices.
Diversification Based on Asset Class
This type of diversification is commonly done by investment managers and investors. The purpose is to determine the percentage of portfolio that will be allocated to these asset classes. The asset classes referred to are such as issuer stocks, bonds, property, exchange-traded funds, commodities or basic goods needed for the production of products or services, as well as cash and cash equivalents.
Advantages and Disadvantages of Diversification
After reading the description above, of course you already know that there will be many advantages obtained if doing diversification. However, besides the advantages obtained, there will certainly also be disadvantages that accompany. Quoted from Lifepal, the following are the opportunities for advantages and disadvantages of diversification:
Advantages of Diversification
One of the most widely felt advantages is minimizing losses obtained. The following are other advantages you can get:
- Increase income for companies and profits in investments.
- Not depending on one product to get profits.
- For business, diversification makes you able to meet other needs of customers or consumers with various types of products.
- Expand the market and add value to products.
- In investment, able to add investor knowledge in that world.
Disadvantages of Diversification
One of the shortcomings of diversification strategy for both business actors and investors is a fairly troublesome and exhausting process. Because you will be faced with various businesses or investment instruments owned, which results in you having to always monitor these conditions. The following are some other disadvantages of diversification strategy:
- Costs incurred increase, both for business and investment. In business, if you make different products, of course it requires different initial capital as well. Meanwhile in investment, the capital needed for mutual funds and property is clearly far different.
- Must conduct research because entering a new market and new instruments.
- Need special attention and reliable people to manage new businesses.
- In investment, too often doing diversification can actually close opportunities for investors.
Do Investment Diversification with BTN Prioritas Products
After understanding about diversification, you as an investor must be careful in choosing various investment products to get maximum profits. The products you choose must be guaranteed credibility so that the funds you spend are safe and can grow.
BTN Prioritas has two types of investment products, namely mutual funds and bonds. From these two types, there are various categories you can choose according to your investment needs and goals. For example, Equity Fund in the form of mutual funds aimed at obtaining profits from Indonesia's economic growth with investments in stocks. Examples of this product are Manulife Dana Saham Class A, Trim Kapital Plus, and others.
