Unlike the average individual, firms have the time and resources to research a wide variety of stocks in many different sectors. Click here to learn more about mutual funds . One major reason for investing in mutual funds is to reduce risk through diversification. A heavily concentrated position can be disastrous if that particular issue falls in price or, worse yet, goes out of business. While diversification can never guarantee you won't experience losses, establishing numerous positions in different industries can help reduce the amount of risk in a portfolio.
Risk is associated with volatility .
If a portfolio tends to be more volatile, we consider it to have a higher degree of risk. A dilemma individual investors soon face is the lack of capital to establish a truly diversified portfolio. On the other hand, a very small initial investment in a mutual fund allows you to be highly diversified without having to pay multiple commissions. To further diversify your portfolio, choose a variety of funds. When selecting a diversified portfolio of mutual funds avoid a common mistake.