📊 Rethinking Diversification: Lessons from the COVID

VS FINTECH
Jul 7
2 min read

This chart compares the performance of three portfolio strategies:

Nifty 100 Adjusted (Dashed Line): Large-cap equity portfolio
N500 Equal Weight Adjusted (Blue Line): Broad-based equity portfolio (Large + Mid + Small Cap)
Multi-Asset Adjusted (Pink Line): Diversified mix of Large Cap Equity + Gold + Bonds

💥 What the Data Reveals:

Around point 27 (COVID crash), the LMS portfolio (Blue Line) dropped sharply, highlighting its vulnerability during major market downturns.
In contrast, the Multi-Asset portfolio (Pink Line) demonstrated superior downside protection, recovering steadily and maintaining a more stable trajectory.
By the end of the period (~point 59), both strategies yielded similar returns. However, the path to those returns was far smoother for the Multi-Asset strategy.

🚨 The Diversification Myth:

❌ Myth: Diversifying across Large, Mid, and Small Cap stocks is enough.

While this approach spreads investments across different company sizes, all three are equities and highly correlated. In a market crash, they fall together — offering no true cushion.

✅ The Smarter Reality:

✅ Reality: True diversification combines opposite or less correlated asset classes, such as:

Equity (Large Cap)
Gold (often rises when equities fall)
Bonds (provide income and stability)

This combination reduces portfolio volatility and improves risk-adjusted returns — especially in crises like COVID-19.

🔍 Key Comparison Table:

Feature	Large+Mid+Small Cap (N500 EW)	Multi-Asset (Equity + Gold + Bond)
COVID Crash Impact	High drawdown (~40%)	Low to moderate (~10-15%)
Return (after 2 years)	~1800 units	~1800 units
Volatility	High	Moderate
Recovery Path	Sharp drops, delayed recovery	Smooth, consistent recovery
Asset Correlation	High (all equities)	Low to negative

📈 Bottom Line:

Diversification isn’t just variety — it’s strategic contrast. Combining non-correlated assets like equity, gold, and bonds offers a safer, more resilient investment journey — especially during turbulent times.