Mutual Funds Are a Good Way to Diversify Your Investments

Article excerpt

For a growing number of people, the question is not whether to invest in mutual funds, but rather how many mutual funds to invest in.

The answer centers on the concept of diversification, which is no more complex than the notion of not putting all your eggs in one basket.

Being in several places, your fortune no longer hinges on the fate of just one company. Ideally, by diversifying, if one or two investments go down, the others will have gone up enough to buoy your entire portfolio. Mutual Funds Diversify For You

Diversification is one of the key attributes of mutual funds.

Investors who like equities would have to buy dozens of different stocks to be represented among enough different companies to be adequately protected should several of those investments do poorly.

That's where mutual funds come in.

Stock mutual funds, for example, pool investors' money and buy shares in scores of companies. Many investors could not afford to do that. By pooling the money, mutual funds allow even small investors to have a piece of dozens of companies, often with as little as a $1,000 initial investment.

But are you diversified enough after buying into only one mutual fund? "It depends on how much money you have," says Rebecca Sorenson, a personal finance specialist with McDonald & Co. in Birmingham, Mich.

Investors with less than $10,000 probably should settle for one mutual fund, provided it has a strong long-term record. …

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