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Mutual funds invest in a wide variety of securities in different
investments across different types of securities and areas leads to lowered
risk. This is called diversification.
Diversifying works because not all types of securities respond
the same to overall market changes. When some securities fall, others may
increase in value. Losses from some securities are offset by gains in others.
This allows your investment to remain stable despite the ups and downs of
Diversifying makes mutual funds less risky than investing solely
in one type of investment. In other words, it's a great way to avoid putting all
your eggs in one basket.
By diversifying in different stocks within the same industry, you
protect yourself from one company's financial hardships. When you diversify
among stocks in different industries, you protect yourself from a downtrend in
any one particular industry. By diversifying among stocks, bonds, and cash, you
protect yourself against overall economic trends that may adversely affect one
particular type of security as compared to another. However, diversification
does not guarantee that your mutual fund will not lose money in the market.
Now let's look at how easy it is to invest in a mutual