Diversification is an integral part of financial management as it helps to reduce the risk associated with a particular asset class and or a single security in the asset class.
By investing in a single mutual fund unit, an investor gets exposure to varied underlying financial instruments that the scheme has invested in compared to a single instrument exposure in individual investment. For instance, investment in the SBI Bluechip Fund enables investors to enjoy exposure to 43 stocks as of October 2013 which would be difficult if the investors choose to invest on their own. Further, the fund can spread investments across different sectors. Hence, diversification through mutual funds ensures that the portfolio meets the goals.
Further, all asset classes behave differently under different market situations, i.e., all do not rise and fall at the same time. For example, in 2008 when the equity market (S&P CNX Nifty) fell by 52%, gold prices (CRISIL Gold Index) rose by 27%. In 2011 when the equity market fell by 25%, gold rose by 32%. Thus, an investor relying only on equities would have made greater losses in 2008 and 2011 vis-Ã -vis an investor who had held a portfolio of equity and gold.