How can I mitigate risks in my stock portfolio through diversification?

To mitigate risks in your stock portfolio through diversification, invest across different asset classes, industries, and geographies. Balancing investments in large-cap, mid-cap, and small-cap stocks helps reduce market impact and volatility.

1. Invest Across Different Sectors

Spreading investments across various industries reduces the impact of sector-specific downturns.

• Include stocks from technology, healthcare, finance, and FMCG sectors.
• Avoid overexposure to a single industry.
• Monitor sector performance to maintain balance.

2. Balance Large-Cap, Mid-Cap, and Small-Cap Stocks

A mix of different market capitalizations ensures a stable risk-reward ratio.

• Large-cap stocks provide stability and steady growth.
• Mid-cap stocks offer a balance between growth and risk.
• Small-cap stocks have high growth potential but carry more risk.

3. Add International Stocks to Your Portfolio

Investing in global markets protects against domestic economic downturns.

• Include US, European, and emerging market stocks.
• Invest in international ETFs for broader exposure.
• Consider currency risk while investing globally.

4. Invest in Different Asset Classes

Combining stocks with bonds, gold, and real estate reduces portfolio risk.

• Gold and fixed-income securities hedge against stock market volatility.
• Real estate investments provide long-term stability.
• Asset allocation should match your risk appetite.

5. Use ETFs for Passive Diversification

ETFs offer broad market exposure at low costs, reducing individual stock risks.

• Invest in index ETFs for stable growth.
• Sectoral ETFs provide focused diversification.
• Choose ETFs based on historical performance and expense ratios.