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DIVERSIFICATION
Learn even more about this topic with the Encyclopedia of Personal Finance™

Mutual funds invest in a wide variety of securities in different industries.

Spreading 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 different markets.

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 fund.




LEARN EVEN MORE WITH THE ENCYCLOPEDIA OF PERSONAL FINANCE. CLICK HERE!

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