5 Reasons to Invest in a Diversified Fund

You can attempt to diversify your portfolio through individual investments, or you can buy into a diversified fund to capture the same benefits. When you invest in a diversified fund of any type, you are selecting just one investment that will effectively give you holdings in low-risk and high-risk investments across multiple industries and markets. 

#1 Mitigate Risk

The main goal of diversifying is protecting yourself from dips in any one area of the market. For example, you may have a handful of securities in green technology, a handful in manufacturing, a number of gold bonds and some foreign currencies. If the manufacturing market experiences a dip, the other markets will hopefully remain stable, helping you avoid too great a loss. Further, you are spread out across not just industries but risk levels. For every high-risk, potentially high-reward security you own, you owe an equally low-risk, low-potential-reward security. 

#2 Provide for Income Sustainability

Since the fund is risk-diverse as well as industry-diverse, the income you earn off the fund should at least match the market if not beat it as a whole. For example, most funds hold a certain percentage or number of municipal or government bonds. There is little chance you will earn a big profit with these bonds, but you will always be guaranteed a consistent yield. In the case of a market crash, the fund's diversification means you do have some cash or cash equivalent holdings that can be liquidated if needed in a slow market. 

#3 Avoid Trending

Trending in the marketplace can skew prices, create bubbles and ultimately cause crashes. In a well-diversified fund, you will have holdings in areas that may be trending, but you will balance these with holdings in under-valued securities. The result, hopefully, is that you never become too heavily dependent on the profit of one area of the market. If the prices in this area turn out to be the product of a bubble instead of an actual rise in value, you may lose a little money, but you should be protected from catastrophic losses.

#4 Mitigate Capital Gains Exposure

With a fund, you will be paid income regularly, and you will not see very high capital gains. This is intentional, because the fund is designed to convert nearly all capital gains into income for your benefit. If you do see some capital gains, they may be offset by a capital loss. This can mitigate the amount you will owe through capital gains tax on a yearly basis. 

#4 Make it Easy on Yourself

Ultimately, trying to diversify your holdings by yourself can be a lot of work. Instead of attempting to select individual securities all across the market, you can simply pick one fund, purchase shares, and call it a day. Of course, you will need to read your fund's prospectus and ensure your diversification goals are consistently met in the future. If the fund does its job, though, you will never have to worry about whether you are invested too heavily in one area.

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