Definition
Instead of putting all your money in one place, invest your money across different investment options. This can include different asset classes, such as stocks, mutual funds, commodities, bonds, F&O, corporate FDs, IPOs, gold, fixed deposits, or NFO. This strategy is known as diversification. The goal is to reduce risk because if one investment performs poorly, others may perform differently and help reduce the overall impact on your portfolio.
Example
Suppose you have Rs 2,00,000 to invest. If you invest the entire amount in the shares of a single company and that company performs poorly, your entire investment could be affected. Instead, you could spread your money across different investments, such as stocks, mutual funds, bonds, fixed deposits (FDs), and commodities, based on your financial goals and risk appetite. Since these investments may perform differently under the same market conditions, poor performance in one investment is less likely to significantly affect your overall portfolio. Diversification helps reduce investment risk, but it does not eliminate it.
Caution
Diversification can help reduce overall investment risk, but it does not guarantee profits or completely protect against losses. Investors should choose investments based on their financial goals, risk tolerance, and investment time horizon.