What is a portfolio?
The sum-total of all your investments in different financial assets like stocks, bonds, commodities, real estate, art, mutual funds, etc., is your portfolio.
Your portfolio could be either managed by you personally or by financial professionals and money managers.
Choosing a portfolio
To begin investing and creating a portfolio, you first need to assess your risk appetite. If you seek a portfolio with stable returns you can invest in balanced funds who invest nearly 60% to 65% in equities. If you are a conservative investor then you could look at an equity allocation of around 20% to 25%. However, if you have high risk appetite for higher returns, then you can pick aggressive funds who invest nearly 90% of your money in equities. These three forms of investments could be managed via long-term SIPs (Systematic Investment Plans).
Why diversify?The purpose of diversification is to reduce risk across asset classes. If you put all your investments in one asset class, there is a high-risk of you losing all your capital. Therefore, diversifying or dividing your capital across a variety of asset classes would help you lower risk. This will also help offsetting losses in one asset class with gains from another. Mutual funds do offer you the advantage of diversification as you can invest in multiple funds based on your risk appetite. Also, each fund is managed by a professional fund manager who keeps track of the market movements and re-balances the portfolio to ensure better returns.