Many investors use mutual funds to diversify their investments and to allocate assets across a broad range of investments.
How mutual funds diversify
Mutual funds are ready-made portfolios of investments.
Mutual fund portfolio managers allocate the funds' dollars in different ways to achieve different investment goals; for example, to meet the goal of growth, a manager may concentrate on growth stocks and allocate lesser amounts of the fund to bonds and cash.
Since mutual funds are already set up with certain percentages of stocks, bonds, and cash, you may be able to find funds that meet your personal criteria for diversification. If you do, you will save yourself the time and arithmetic of building your own portfolio.
Each mutual fund has its own investment objectives. If you are seeking growth, there are growth funds; if income, use income funds. If you are looking for a simple way to take advantage of asset allocation, asset allocation mutual funds use allocation formulas to manage the percentages of each type of security held as the market changes, that seek to achieve the fund's allocation objective.
The advantage of mutual funds
Using mutual funds for diversification and allocation is a simple way to work toward building a portfolio that does not require a lot of capital and trading. But you still need to know what you're doing. In addition to diversification, mutual funds offer other advantages that are worth considering, such as economies of scale and liquidity.
In addition to the advantages of mutual funds, make sure to consider the risks of mutual funds.
Mutual funds have fees and expenses, and investing in them also involves risks including but not limited to the possible loss of principal, all of which are all outlined in the prospectus.
Dive Deeper: How to create a portfolio
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