Investment diversification is a risk management strategy. In order to implement an investment diversification strategy, an investor will buy investments that have different risk/reward characteristics.
The most basic investment diversification strategy will include both stocks and bonds (either through mutual funds or direct purchase of stocks and/or bonds). Adding various stocks to a portfolio adds investment diversification in the sense that if one stock performs poorly, then you may have another stock that does well. By adding bonds to a portfolio, an investor will achieve even greater investment diversification.
The greatest investment diversification may be accomplished by adding stocks of differing market caps (large cap, mid cap and small cap) and by adding various types of bonds (from municipal bonds to corporate bonds).
Investment diversification is a great advantage of mutual funds. This investment diversification of a mutual fund means that an investor is able to obtain instant access to a hundreds of individual stocks or bonds with a low minimum investment. Otherwise, in order add investment diversification to your portfolio, you might have to buy dozens of individual stocks and bonds.
In different words, an investor can achieve diversification with just one or two mutual funds, depending upon the type of fund.
02Professionally Managed Porfolios
Mutual funds are professionally managed portfolios. Many investors don’t have the resources or the time to buy individual stocks so they turn to these professionally managed portfolios.
Most investors have careers, families, hobbies, and/or other interests that consume their time. In contrast, mutual fund managers and analysts wake up each morning dedicating their professional lives to researching and analyzing current and potential holdings for their mutual fund. If you prefer to enjoy your time rather than pour over financial data, then use professionally managed portfolios.
03Types of Mutual Funds
The various types of mutual funds are an advantage of this structure of investment. Investors can diversify their portfolio by looking no further than mutual funds.
Whether you need to add large cap equities, international equities or bonds to your portfolio, you are able to do so with mutual funds. There are even target date funds that will hold various types of mutual funds all wrapped into one.
Therefore investors can easily build a diversified portfolio with just three to five mutual funds from different categories, such as large-cap stock, small-cap stock, international stock, and bonds.
Additional Articles on Types of Mutual Funds
- The Pros and Cons of Target-Date Funds
- Learn How Mutual Funds Work
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.
3 Pros of Mutual Funds - Professionally Managed Portfolios
There are both pros of mutual funds and cons of mutual funds. Let’s take a look at a few of the pros of mutual funds and what they may offer the novice and experienced investor alike.