Diversification is a very simple and most fundamental way of reducing your risk. This is the simplest form of hedging your portfolio and qualifies more as spreading your risk rather than hedging your portfolio. What diversification means is that you spread your risk across more assets with focus on dissimilar assets. If you are holding banking stocks then adding more banking stocks beyond a point only adds to the risk. You also need to diversify across themes, which are slightly different from sectors. For example, IT and pharma may be fundamentally different sectors but both react negatively to dollar weakness. That is the common theme in these two sectors and hence you need to manage your exposure to these two sectors when the INR is strengthening. You must know that diversification has a numerical limit. It works up to 10-12 stocks. Beyond that, it only substitutes risk! In fact, Buffett calls it diworseification as it only worsens your risk.