Diversification

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Diversification is a risk-management technique that mixes a wide variety of investments within a portfolio in order to minimize the impact that any one security will have on the overall performance of the portfolio.

Diversification essentially lowers the risk of your portfolio. There are three main practices that can help you ensure the best diversification:

1. Spread your portfolio among multiple investment vehicles such as cash, stocks, bonds, mutual funds, and perhaps even some real estate. Alternately you could invest only in mutual funds but of varied types. For example you could invest 30% in equity schemes, 40% in debt/income schemes and 30% in money market schemes. You could also invest in commodity funds or real estate funds although as and when permitted by SEBI.

2. Vary the risk in your securities. If you are investing in equity funds, then consider large cap as well as small cap funds. And if you are investing in debt, you could consider both long term and short term debt. It would be wise to pick investments with varied risk levels; this will ensure that large losses are offset by other areas.

3. Vary your securities by industry. This will minimize the impact of specific risks of certain industries.


Diversification is the most important component in helping you reach your long-range financial goals while minimizing your risk. At the same time, diversification is not an ironclad guarantee against loss. No matter how much diversification you employ, investing involves taking on some sort of risk.
Another question frequently baffles investors: how many stocks should be bought in order to reach optimal diversification? According to portfolio theorists, after around 20 securities, you have reduced almost all of the individual security risk in a portfolio. Thus 20 securities is a good reference number from the point of view of diversifying your investments.