What Is a Diversified Fund?
A diversified fund is an investment fundthat is broadly invested across multiple market sectors, assets, and/or geographic regions. It holds a breadth of securities, often in multiple asset classes. Its broad market diversification helps to prevent idiosyncratic events in one area from affecting an entire portfolio.
Index funds are prime examples of diversified funds, although diversified funds need not track an index and may be actively managed. Moreover, an equity index fund, for example, is only diversified within the universe of stocks and does not hold other assets like bonds or commodities. A diversified fund can be contrasted with specialized orfocused funds, such assector funds, which focus on stocks in specific sectors such asbiotechnology, pharmaceuticals, or utilities
Key Takeaways
- Diversified funds refer to pooled investments that build portfolios across several asset classes, regions, and/or industry sectors.
- Diversification is a key investment strategy for reducing systematic risk in a portfolio while maintaining levels of expected return.
- Diversified funds can range in focus from passive indexed funds that replicate broad indices to actively managed funds that invest broadly.
Understanding Diversified Funds
Diversified funds primarily seek to mitigate idiosyncratic or unsystematic risk by investing in a broad array of securities across multiple market sectors or geographic regions. Diversified funds may also choose to manage stocks across multiple countries. A multi-regional fund also investing in multiple sectors would be one of the market’s most broadly diversified funds. Diversified funds can also invest across multiple asset classes to help spread risks even more. With a multiple asset class portfolio, managers can also seek optimization of returns.
Overall, diversified funds are mindful of both unsystematic and systematic risks. They seek to mitigate these risks through their broad diversification. Since unsystematic risks are often sector-specific they can be alleviated by multi-sector investing. Funds broadly diversified across regions may also be able to manage against some market-wide systematic risks that are inherent to a particular country or region.
Investors choose diversified funds for several reasons. Conservative investors may seek diversified funds because they offer a lower risk of concentrated losses without sacrificing expected returns. Diversified funds are thus also often optimized for a balance that gives investors the highest return for their risk.
Diversified Fund Investing
Generally, all funds offer diversification by investing in a broad array of securities. Investment funds in general will help investors diversify the idiosyncratic risks that can affect one security or a group of securities in a specific sector. When seeking diversified funds, investors may need to closely consider the types of risks they wish to mitigate or exposures they wish to retain.
Index Funds
Broad market index funds can be one type of diversified fund, offering low costs with broad market diversification. The Wilshire 5000 Index Fund (WFIVX) for example, seeks to track the return and holdings of the Wilshire 5000 Index. The Wilshire 5000 Index represents the entire U.S. equity investable market. Therefore, investors have exposure to the full range of U.S. market sectors and capitalizations. It will however be subject to the overall systematic market risk affecting U.S. companies in general.
A globally diversified index fund can offer mitigation of unsystematic risk and some systematic risks associated with markets in individual countries. The Vanguard Total World Stock Index Fund is one example. The Fund seeks to track the holdings and performance of the FTSE Global All Cap Index. It includes developed and emerging market stocks across all market sectors and capitalizations.
A balanced fund is amutual fundthat typically contains a component of stocks and bonds. A mutual fund is a basket of securities in which investors can purchase. Typically, balanced funds stick to a fixedasset allocationof stocks and bonds, such as 70% stocks and 30%bonds, or 60/40, etc.
Actively Managed Funds
Vanguard and JPMorgan offer some of the industry’s top actively managed diversified funds.
Vanguard Diversified Equity Fund: The Vanguard Diversified Equity Fund invests in eight actively managed U.S. stock funds for diversification. Through the underlying funds, the Vanguard Diversified Equity Fund seeks to offer diversification across growth, value, and capitalization. The Fund’s top underlying holding is the Vanguard Growth and Income Fund.
JPMorgan Diversified Fund: The JPMorgan Diversified Fund invests in a diversified portfolio of equity and fixed-income investments. The Fund invests in both underlying funds and individual stocks.
FAQs
Diversification is the practice of spreading your investments around so that your exposure to any one type of asset is limited. This practice is designed to help reduce the volatility of your portfolio over time.
What is a diversified fund? ›
A diversified fund is an investment fund that is broadly invested across multiple market sectors, assets, and/or geographic regions. It holds a breadth of securities, often in multiple asset classes. Its broad market diversification helps to prevent idiosyncratic events in one area from affecting an entire portfolio.
How does diversified investment work? ›
Diversification is an investing strategy used to manage risk. Rather than concentrate money in a single company, industry, sector or asset class, investors diversify their investments across a range of different companies, industries and asset classes.
What does it mean to diversify your portfolio answer? ›
Diversification is the spreading of your investments both among and within different asset classes. And rebalancing means making regular adjustments to ensure you're still hitting your target allocation over time.
What are the three 3 factors to consider in diversification? ›
There are several factors that influence diversification. These include financial health, attractiveness of the industry and/or market, availability of workforce resources and government regulatory policies. Diversification depends on financial health of a firm.
What is a diversification strategy in simple words? ›
A diversification strategy is a practice that companies use to help expand their business. By branching out into new product offerings or markets, companies can promote financial security, industry growth and the acquisition of a larger target audience.
What is diversification with an example? ›
Here are some examples of business diversification strategies: Product diversification: A company that primarily sells clothing might expand into selling home goods and accessories. Market diversification: A company that sells only in the domestic market might expand into international markets.
What are the benefits of diversification of funds? ›
Investing globally helps us: Spread the risk – If one asset class or region is underperforming, another might be doing well. Diversification helps balance potential losses. Capture potential growth – Some markets are growing faster than others, which means there may be opportunities to capitalize on higher returns.
What are the benefits of diversified fund portfolio? ›
Allows you to swap between investments
Diversification is a prudent strategy that every investor should employ. It enables investors to rebalance their portfolios and profit from market volatility. It enables investors to diversify their holdings among asset types, hence increasing annual returns.
Is diversification good or bad? ›
Diversification is a common investing technique used to reduce your chances of experiencing large losses. By spreading your investments across different assets, you're less likely to have your portfolio wiped out due to one negative event impacting that single holding.
Diversification aims to maximize returns by investing in different areas that would each react differently to the same event.
How should your money be diversified? ›
First, set aside enough money in cash and income investments to handle emergencies and near-term goals. Next, use the following rule of thumb: Subtract your age from 100 and put the resulting percentage in stocks; the rest in bonds. In other words, if you're 20 years old, put 80% of your assets in stocks; 20% in bonds.
What are the pros and cons of diversification? ›
It can help you increase your revenue, reduce your dependence on a single source of income, and create a competitive advantage. However, diversification also comes with some risks, such as higher costs, complexity, and uncertainty.
What are the risks of diversification? ›
Risk of Strained Operations
If customers want your new product or service, the requirements to fulfill those sales might strain your ability to operate, making the diversification unwise. You might reduce productivity among employees who must now multitask.
What is a good diversified portfolio look like? ›
A diversified portfolio should have a broad mix of investments. For years, many financial advisors recommended building a 60/40 portfolio, allocating 60% of capital to stocks and 40% to fixed-income investments such as bonds. Meanwhile, others have argued for more stock exposure, especially for younger investors.
What is diversification Quizlet? ›
Diversification. An investment strategy in which you spread your investment dollars among industry sectors.
What is diversify quizlet? ›
Diversification definition: An increase in the variety of products and services a firm offers, or markets and geographic regions in which it competes. Two types of Diversification: -Product diversification. -Geographic diversification.
Why is diversification key? ›
Diversification is a common investing technique used to reduce your chances of experiencing large losses. By spreading your investments across different assets, you're less likely to have your portfolio wiped out due to one negative event impacting that single holding.
What is diversification in marketing quizlet? ›
Diversification is: a. the process of entering new industries, distinct from a company's core or original industry, to make new kinds of products for customers in new markets.
