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Mutual Funds Explained: Diversification

We have all heard of the term ‘Don’t put all your eggs in one basket’ and generally, this saying can be applied to many situations. In investing, it is no different.


 In fact, not putting all your eggs in one basket, also known as diversification, is the best strategy to reduce the total amount of risk any individual is exposed to.


As an investor holds multiple assets, often across multiple categories, the investment risk is minimized by removing the possibility that any one ‘bad’ asset or company could bring down your entire portfolio.


The rule of thumb in investing is: earning higher returns is only possible by taking on greater risk.


 So how does this concept apply to Mutual funds?


In our first article, we discussed the point that mutual funds offer diversification and given that they are professionally managed, it provides value to investors as many investors do not have the skills or time to monitor each investment in the way that a professional fund manager would each day.


Investing in mutual funds, makes the job of diversification much easier as these funds are already invested in diverse holdings. The beauty of mutual funds is that you can invest any amount of cash, based on your financial capabilities, in a fund and obtain instant access to a diversified portfolio. Otherwise, you would have to buy many assets individually in order to create your diversified portfolio which can be costly and time consuming.


Note that no two mutual funds are the same. They are managed differently, have different objectives/goals and are even exposed to different sectors and geographical areas. Therefore, it is advised before investing in Mutual Funds, that you understand the objective of the fund and ensure that it aligns with your investment goals.


Article by the: Mutual Funds Association of Trinidad and Tobago





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Mutual Fund Association of Trinidad and Tobago
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Telephone: (868) 625-8648
Fax: (868) 625-5627
Website: http://mfatt.org