The following steps will guide you to do so.

If you want to increase the capacity of the virtual disk, you need to resize the disk image. The disk image you have created is a dynamically expanding one, but it can only be expanded up to the size limit that was assigned during it’s creation. Increase size of encrypted disk image on Mac So even if you create a disk image of the same size as your external hard disk, the actual size of the disk image will correspond to the size of the data stored in it. As you mount the disk from the image and save files into it, the image size will automatically increase to contain the files. This is the advantage of sparse bundle disk image. You’ll notice that the size of the actual disk image is much smaller than the assigned size. Finally, click on the Create button to save the disk image on your external drive.This will make the disk image as a dynamically expanding one. Set the image format as sparse bundle disk image.256-bit AES encryption is more secure than 128-bit AES, but also takes longer to decrypt. To protect the disk with password, choose an encryption method.Further, you can give a custom name to the disk that will be mounted from the image, and choose its size and format.This will create the disk image on your external drive. In the popup that appears, provide the name of the image file and select the save location as your external drive.Click on New Image from the top panel in Disk Utility.Launch Disk Utility from Applications directory.Connect your external hard drive to Mac via USB.The following steps will allow you to create a new password protected disk image on Mac:

Defrag mac external hard drive