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 a 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 a lower cost, as well as the expertise of a professional investment manager.