Act of investing in different kinds of investments to Lessen risk.

Diversification follows the principle of not putting all your eggs in one basket. It is the process of investing in different securities and asset categories in order to minimize the overall risk involved. With this practice, the poor performance of one stock, sector or asset class does not significantly damage the total portfolio’s performance.

Diversification can be done across asset classes or even with asset classes with market capitalization. It can be done by the fund manager of a diversified mutual fund keeping the investment objective in place or by the investor as well.