Definition of Diversification
Diversification is the practice of spreading investments across multiple assets, sectors, geographies, or asset classes to reduce the risk that any single investment's poor performance will significantly hurt the overall portfolio.
The classic saying is: 'Don't put all your eggs in one basket.' In practice, diversification means not just owning multiple mutual funds (which may actually overlap in holdings), but spreading across equity, debt, and gold; across large-cap, mid-cap, and small-cap stocks; and potentially across Indian and international markets.
However, over-diversification (owning too many funds with similar portfolios) is counterproductive. Use InvestKit's Portfolio Overlap Tool to check if your funds are truly diversified or just duplicating the same holdings.