Diversification vs hyper-diversification

Aug 16, 2022

Diversification vs hyper-diversification

In this blog, we shall take a look at what the hyper-diversification principle for FMPP is, and how it makes FMPP a unique and the most well-balanced investment avenue. 

We shall begin by taking a look at the types of diversification. To elucidate diversification, we shall first understand how diversification, as opposed to concentration, offers a basis of safety for an investment.

Diversified vs concentrated investments

Concentrating all your investment funds in one investment avenue is never a good idea. Diversification of your investment portfolio is something every financial advisor suggests. 

After all, it is a safe basis for any investment; the more the funds concentrated in one place are, the riskier it is since it can compromise the principal, let alone earning good returns. 

For risk-free investments, namely in fixed deposits, recurring deposits, etc, concentration of funds can prove detrimental since such asset classes do not give high yield at maturity. Many traditional fixed-income asset classes do not outpace the inflation rate; hence, in spite of earning returns, there is some loss of value to the investment amount.

Types of diversification

Diversification of funds is plausible in various forms. One can invest in multiple investment avenues to have a diversified portfolio. Besides, investing with different maturity periods is another form of diversification. Opting for varied asset classes, all differing in terms of risk, namely market-linked asset classes, bank-facilitated asset classes, etc, is also a form of diversification.

The best way of achieving a mean is by meeting a healthy mix and match of all the above-mentioned diversifications. One can, therefore, go for a varied portfolio with different investment terms and amounts. Multi-strata/Longitudinal diversification is another mean-achieving way. One can go for small-sized, medium-sized as well as large-sized funds in a chosen asset class.

Means-driven or End-driven diversification

There are two approaches for diversification of an investment portfolio, namely means-driven and end-driven diversification. The former depends on the resources in hand, while the latter depends on the end goal one aims for.

Since most asset classes have some entry-point investment amounts, having a diverse portfolio can mean locking in funds that could compromise the liquidity. Hence, means-driven portfolio diversification can be an option for every investor. One has to evaluate factors like cash availability; risk factors across the investment avenues, etc; fixed and likely inflow of income over every determined frequency; etc. 

End-driven diversification is great at wealth building; planned big purchases, namely properties, jewellery, etc. Hence, given a good amount of cash in hand, one can opt for an end-driven diversification option.

Hyper-diversification

As we know by now, diversification is definitely an indispensable measure of earning returns with surety. Hyper-diversification, thus, is an even greater measure. In the hyper-diversification principle, the allocation of funds can be limited to individual asset classes, or the pool of the end investments is larger. 

Hyper-diversification is at the core of FMPP

FMPP, a Fixed-Maturity Peer-to-Peer Plan from LenDenClub, has been uniquely devised to work on the principle of hyper-diversification; where with other P2P plans, the funds are diversified over a small pool of borrowers, with FMPP, the funds allocated are as low as ₹1 per borrower. This way, there is platform-level uniformity in portfolio performance. 

FMPP, a solution for all investment needs

When it comes to FMPP, LenDenClub on-boards Credit Bureau-verified borrowers who are further screened over 200+ verification points. This way, by passing them through two checkpoints, LenDenClub ensures on-boarding only of those borrowers who are likely to repay their debts. Besides, owing to the hyper-diversification principle, FMPP investors enjoy Marginalised NPA since the default is evened out on a portfolio level for Systematic Risk Mitigation. 

FMPP, being a P2P investment plan, works on a mechanism that is free of market volatility. Hence, where asset classes like mutual funds, primary and secondary market assets, etc are conditional upon market volatility, P2P investments are subject to repayments from individual borrowers. Due to Systematic Risk Mitigation and on-boarding of borrowers with two checkpoints, LenDenClub ensures a strong returns proposition of  up to 10 to 12% p.a.*.For a tenure of five years, one can earn yield of up to 12.21 to 15.25% p.a.*

FMPP is a great investment solution since it offers returns that are not only high but also . Besides, the P2P investment mechanism is not prone to market volatility. Hence, it can be a means of portfolio diversification. It can be used strategically for multi-asset or multi-strata investments. 

FMPP is also a one-point solution for investment since, due to its well-balanced nature, it can be used as a standalone investment avenue. The entry-point investment amount of ₹10,000 means it is great for serious investments with financial convenience. Besides, in terms of multi-strata investment, FMPP gives you the flexibility to invest any amount from ₹10,000 to ₹10 lakh or up to ₹50 lakh with the submission of a net-worth certificate. Hence, one can invest within the minimum and maximum amounts across different times.

Conclusion

FMPP has been designed to give you double-digit returns. Its unique hyper-diversification principle ensures you earn the propositional value of up to 10 to 12% p.a.*

*P2P investment is subject to risks. And investment decisions taken by a lender on the basis of this information are at the discretion of the lender, and LenDenClub does not guarantee that the loan amount will be recovered from the borrower.

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