A diversified fund is any type of investment fund that is composed of a wide range of investments, with each of those investments carrying a different degree of risk or volatility. The idea behind this type of fund is to create a situation where the investor continues to earn a return from the fund even if some of the assets are not performing well. Since the scope of investments contained within the fund are so varied, the ones that are increasing in value easily any lack of growth exhibited by stocks and other investments that are either stagnant or have posted a loss.
The concept of the diversified fund is in contrast to what is generally known as a focused or specialized fund. With these types of funds, the plan is to purchase investments that are all related to a specific industry or field, or are all connected with a given geographical location. For example, a focused fund may include stocks issued by pharmaceutical companies, as well as bond issues that relate to the construction of new facilities by those same pharmaceutical companies. As long as those companies are performing well, then the return on the investments is likely to remain quite high. Should factors take place that undermine the performance of those companies, then the value of the shares and the return on the bonds may be adversely affected, resulting in a significant loss for the fund.
With the diversified fund, a scenario of this type is much less likely. If the fund contains investments that related to several different industries, there is a good chance that at least a few of those investments will be producing a high return even as others are performing at a more modest level. Should the diversification include investments connected with textiles, construction, and commodities, and the textile investments sustain a decrease for a period of time, the upward movement of the construction investments and the commodities cover that loss. This allows the fund to continue growing, albeit at a pace that is slower than if all the investments were increasing in value.
For investors who tend to be more conservative and want some type of steady return, a diversified fund approach makes sense. In the event that a particular set of investments do not show any indication of recovering after losing value for some time, they can normally be replaced with other options that show greater promise. By maintaining a wide range of stock options, bonds, commodities, and other investments within the diversified fund, it is much easier to minimize the overall impact of any one of those securities and thus allow the investor to continually move closer to his or her ultimate financial goals.
