Diversification
“Don’t put all your eggs in one basket.” This is a well-known proverb, which best explains the concept of diversification in a financial portfolio.
In simple words, diversification is a practice in which your money is spread among different investment options such as stocks, mutual funds, FDs, bonds, debt funds, real estate and gold. This doesn't refer to an exposure to different products but across different asset classes based on your risk appetite and future goals.
The process of diversification of portfolio to different asset classes significantly reduces the risk quotient of your portfolio.
For instance, if the stock market falls, the debt, gold and real-state component will cushion the impact of its losses. At the same time, you don’t avoid any potential gains from the stock market in future.
Thus your portfolio is well poised to absorb any fluctuations on your investment returns.
Hence even if you buy blue chip stocks, ensure you invest in different sectors. Large cap diversified mutual funds are another good example of diversification in which a fund manager picks up a basket of stocks of different large cap companies.
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