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What is a Diversified Mutual Fund?

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  • Written By: Luke Arthur
  • Edited By: Heather Bailey
  • Last Modified Date: 05 October 2018
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    Conjecture Corporation
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A diversified mutual fund is a type of investment that is designed to lower the potential risk for investors. It is made up of many different securities. This type of fund holds many underlying assets, has professional management, has lower risk, and costs money to invest in.

The diversified mutual fund could be made up of several different types of assets. For example, a balanced mutual fund invests in stocks, bonds, and even the money market. There are mutual funds that invest in only stocks and some that invest in only bonds. The diversified mutual fund holds many securities in an attempt to provide a large portfolio of assets for the investor.

One of the benefits of investing in a diversified mutual fund is that the investor will be able to take advantage of professional management. Professional fund managers are in charge of the mutual fund. The fund manager will research all of the potential investments and make the selections for the fund. The fund manager will also be in charge of deciding when to sell the securities and realize a profit.

The fund manager has to think about tax considerations, keeping the investors happy, and realizing a profit. This creates a passive form of investment for those who get involved with a diversified mutual fund. The investor simply has to purchase shares and the fund manager is going to handle the rest of the process.

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This type of investment strategy creates a low risk scenario for the investor. When an investor puts money directly into a security, such as a stock, he or she is taking on the full risk of that stock. If the company goes out of business, the investor will lose everything. When a mutual fund purchases thousands of different shares of stock, the risk for individual investors is going to be lowered significantly. If one of the companies in the portfolio goes out of business, it is not going to negatively effect the entire portfolio that badly.

In order to get involved in a diversified mutual fund, it is going to cost the investor some money. The investor may have to pay a sales charge on the front end of the transaction, known as a sales load. In addition to the sales load, the investor is going to have to pay an expense ratio to cover the ongoing costs of the fund as well.

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