The strategy of spreading investments across multiple assets, sectors, or geographies to reduce risk without proportionally reducing expected returns.
Diversification is the practice of allocating capital across different investments so that the poor performance of any single investment has a limited impact on the overall portfolio. Mutual funds are inherently diversified instruments.
Don't put all your eggs in one basket. A mutual fund spread across 50 companies means no single company's failure can wipe out your investment. Diversification reduces specific (unsystematic) risk while keeping exposure to market-wide (systematic) growth.
Within a fund: diversification across 30–100 stocks across sectors.
Across funds: holding equity + debt + international funds reduces correlation.
Asset class diversification: equity, debt, gold, real estate (REITs).
The benefit of diversification diminishes after 25–30 uncorrelated holdings — beyond that, adding more stocks adds minimal risk reduction.