“To diversify” means to give variety to something. For example, a business can diversify by offering many different products. If some products do not sell well, the business can still earn a profit from the money it makes on other products.
Investing works the same way. If you diversify by putting your money into the appropriate variety of investments, you are protected if some do poorly and the others perform better. The mutual fund product is, by its nature, a diversified investment.
Mutual fund investors benefit from two types of diversification:
- The investor can invest in more than one mutual fund. Finding the right combination of short-term versus long-term funds, based on when you expect to withdraw the money, tends to be the most effective strategy over time.
- The mutual fund typically invests in many different assets and places. For example, a bond fund will hold bonds from many different companies or governments. By pooling their money (investing together) in a mutual fund, unitholders have access to a wide range of investments at lower cost, as well as the expertise of a professional investment manager.