Diversification means spreading investments across different securities, sectors, industries, or asset categories instead of concentrating the entire investment in one place.
Many mutual fund schemes provide diversification by investing in multiple securities according to their stated investment objective.
How Can Diversification Help?
When investments are spread across several securities, the performance of one individual investment may have a relatively smaller impact on the overall portfolio.
Depending on the scheme, diversification may include exposure across:
- Different companies
- Multiple industry sectors
- Equity and debt instruments
- Different market capitalisations
- Various maturities in debt portfolios
Does Diversification Remove Risk?
No. Diversification can help reduce concentration risk, but it cannot eliminate market risk.
Different mutual fund categories carry different levels and types of risk. Investors should therefore review the scheme's objective, portfolio, risk-o-meter, and relevant documents before investing.
Understanding diversification can help investors make more informed decisions when comparing different mutual fund schemes.
