subject: Advantages of Mutual Fund Diversification [print this page] A mutual fund is a collection of bonds and stocks. Diversification of mutual funds involves having different kinds of interests in your portfolio. These interests can also be from different sectors, for example, the hospitality industry, healthcare and financial institutions. This allows an investor to have interests in different companies without having to buy them individually. These collective buying is an advantage to the investor because, it does not necessarily require huge sums of money. You are also at liberty to buy more units on a regular basis. In addition, the risk factor involved is minimal.
Other advantages of mutual fund diversification include; Having professionals manage your investments. This helps save the investor a lot of time, which would otherwise have been spent on researching on their various interests. The professionals get to use their expertise, education, resources and experience in order to make themselves and the investor money. You are also able to achieve balance in your portfolio. When one interest is not doing well, it is balanced by another which is performing well. That is why it is advisable to have a variety of interests that have both growth and risk potential.
In addition, diversification of mutual funds helps in minimizing the amount of money spent on commissions and transaction fees. This helps an investor buy more, but pay less. The funds needed to buy them are also minimal. Liquidation of mutual funds is possible, so long as it is done during business hours. One does not have to worry about their money being tied up, for example during emergencies. Liquidation can take place any time you decide to opt out. However, you can still go back to buying them at a later date. Some institutions will charge you penalties and expense fees for early withdrawals.
Diversification of mutual funds can also provide one with a steady income. This normally happens if you have dividend paying stocks or interests paying bonds in your portfolio. However, you can opt to have your divided payments and capital gains reinvested. More interests are then purchased, which in turn helps grow your portfolio and increase your long term benefits. You can also switch between the various funds. In some institutions this is offered at no extra charge. However, the choice of mutual fund interests will depend on the market capitalization of the institution offering the option.
