Don’t put all your eggs in your basket!
Never test the depth of a river with both your feet!
I am sure most people would have heard one of these proverbs before. What they simply mean is that diversification is the key to successful risk management. Any market investment is subject to a certain amount of risk. While risks can’t be completely avoided, they can at least be managed well and diversification is what helps investors achieve that.
Before investing most investors spend time assessing their investment goals, time horizon and risk preference. This helps them understand the amount of risk they are comfortable with to achieve their financial objectives. Even if the risk taken is high, diversifying can help hedge the risk to a great extent. Mutual funds are inherently designed to diversify investments across various instruments with constant monitoring to ensure that the investment objective of the scheme is met.