Why Are Mutual Funds A Diversified Form Of Investment?

Mutual funds have a built-in diversification – the sheer volume of the capital invested through a fund demands that the managers of the fund not concentrate on just a handful of companies – more the diversification, better the risk and return management. 

One of the predominant advantages to mutual fund investment is the inherent diversification of the investment – commonly referred to as built-in diversification. As an individual, one can choose to invest really small amounts of money in a fund – perhaps just a couple of thousand rupees. But the fund is investing on the behalf of not one individual but hundreds of them – the couple of thousand rupees quickly adds up to tens of lakhs, sometimes, to a few crores.

The manager of the fund, when managing such a huge sum of money, cannot choose to invest it all in one company. Therefore, invariably, diversification occurs. The fund stays true to its objective – to invest in a particular industry or a type of investment, as maybe – but within the predetermined requirements set by the fund, the money gets spread across multiple industries or across dozens of companies, thus reducing the risk to the investor and significantly increasing the ability of the fund to meet its returns objectives.

This inherent diversification allows for a mutual fund to be a reliable means of investment, irrespective of market conditions. Investors do not have to watch the market for a 'good' time to invest – every day is a perfectly good day to begin your investment journey!