Diversify, Diversify, Diversify: Mantra of the Mutual Fund

Every mutual fund attempts to diversify holdings in one way or another. "Diversify" is the mantra of the mutual fund in general, and it provides investors with a number of benefits. Here are the basics of why diversification is important and how mutual funds implement it into their portfolios.

Diversification

Diversification is a very basic investment concept that you must understand in order to succeed. Every investor should attempt to employ some form of diversification into his or her portfolio. Diversification refers to spreading your funds out over a number of different investments. You want to invest in many different things that are uncorrelated. That way, if one of them does not perform well, it will not hurt your portfolio overall. By diversifying, it is possible to make it through tough times in the market relatively unscathed.

Some investors choose to put all their money into one particular form of investment. When that investment goes well, times are great. An investor could potentially make a huge return on her investment. However, it would not take much to make a single investment perform badly. For example, if she invested in the stock of a particular company, if that company files for bankruptcy, her entire investment could be gone. By diversifying that same amount of money over several different stocks, she would have lost only a portion of the investment money when that company went bankrupt.

Mutual Funds

When you invest in mutual funds, diversification becomes quite a bit easier. You give your investment money to a mutual fund to handle for you. They have a trained financial advisor take care of the funds for everyone. A mutual fund will typically have several million dollars worth of money to invest. You might have contributed only a small portion of that, but you still get a piece of every investment that they make. The fund manager will take the money and use it to buy thousands of different shares of stock or other forms of investment. Because of the large amount of money involved, they can truly diversify the holdings of the portfolio. This would not be possible for you as an individual investor because you do not have enough money to do this.

Equity Funds

The equity fund is the most common type of mutual fund available. This type of fund invests only in stocks. While it is investing only in the stock market, it can still diversify itself to a certain degree. These types of funds will buy stocks from many different sectors and industries. Therefore, if one part of the stock market is performing badly, the fund will usually have enough other holdings to make up for it.

Balanced Fund

The ultimate fund for diversification is the balanced fund. With this type of fund, you will actually be able to invest in stocks, bonds and the money market. This type of fund will diversify your assets over several different markets, which protects you even more in the long run.

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