It means holding many types of assets. For example owning shares in many companies or owning some stocks and some bonds. Diversification lowers risk since when some assets are up in value, others are down in value. Diversification, however, can drive up transaction costs for small investors. Mutual Funds are a solution to this problem.
Investors pool their money and the fund then invests in many different assets.
By spreading out trading costs over a larger investment, the percentage transaction costs are often lower. Additionally, each investor need not do the research which further saves expenses. This divisibility of shares allows investors to invest set dollar amounts without worrying about the cost of the shares. Mutual funds also keep track of when people buy and sell. This makes tax reporting easier.