InvestorQ : what do you mean by diversified portfolio? If one has some knowledge on which stocks to buy then should he invest in mutual funds just to diversify portfolio??
Niraj Sonar made post

what do you mean by diversified portfolio? If one has some knowledge on which stocks to buy then should he invest in mutual funds just to diversify portfolio??

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Neelam Naik answered.
2 years ago
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Diversification simply means having varieties. In terms of financing and investment planning, diversification of portfolio means combining different type of assets such that the overall risk can be reduced and return can be maximized. To simplify, if you went to the market to buy vegetables, you would end up buying a whole lot of varieties. You’re not going to stick on a single vegetable, are you? I don’t think anyone would.

Have you ever thought about why? The answer is simple. There’s a risk that if you will buy the same vegetable, most of your family members would get bored with it and the vegetables would end up rotting instead of getting consumed. And when you have the variety you don’t have to worry about the risk of vegetable consumption, because ultimately they may end up getting consumed.

I’m not saying that the funds would get rotten, but yes there’s always a high risk involved in not having varieties. And, yes it is beneficial to diversify the portfolio. Even one who has good knowledge of stock should diversify his portfolio in order to avoid more risk and getting more stability. No matter how good one is at stock trading, uncertainties persist in the stock market. Mutual funds give a balance to such a portfolio.
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