By Peter Egwuatu
THE Nigerian capital market has come of age and with tales of mixed fortune coming from investors on the performance of their investments in the stock market.
Stock market all over the world is dynamic and is influenced by multi economic, monetary and fiscal variables which affect the performance of companies that operate in the market; hence diversification of portfolios becomes key for rational investors that want to maximise their returns.
Risk is another element that is inevitable in the capital market, so a good investor must be prepared to take risk and this is also another reason why portfolio diversification becomes necessary. When an investor has mixed portfolios the risk is reduced drawing from the saying: “do not put all your eggs in one basket”.
Even for the corporate entities there is need for them to diversify their investment. For instance, as a bank it is good if such an entity diversify its credit portfolio as well as income lines to maximise profit and minimise risk. In Nigeria, before now, when universal banking regime was in vogue, banks in the country then have the conventional commercial arm for retail banking services of deposits and withdrawals. They have their insurance arm, the mortgage arm, merchant banking arm etc.
First Bank Nigeria Plc then had First Bank, the commercial arm, First Registrars, FBN Insurance and FBN Merchant Bank . In the event of shift in economic and monetary policies putting one arm in difficulty, they will continue leveraging other arms of the business to remain in business. By this, they have ensured that their portfolios are diversified enough to take care of unforsen adversities while expanding possibilities of more income.
It is a little different for individual portfolio but still similar.
The individual investor selects financial assets more from the capital market into their portfolio due to their limited capital. Investors hold assets for various reasons; it could be for capital gains, tax advantage and safety of capital.
Regardless of whichever reason diversification still presents best way to go.
As government policies keep changing from time to time, investors need to wake up to this fact. Most diversified portfolios would include government securities, Federal or State government bonds. It would balance risks in equities’ content of the portfolio as such bonds are near-zero risk. It also form part of fixed income security.
The return on investment is guaranteed as the interest is fixed. The underlying asset can never fold up as long as the federal Republic of Nigeria continues to exist.
It is therefore necessary for investors to have diversified investment portfolios to begin to take those steps as soon as possible.