Diversification — Mutual Fund Term Explained

Spreading investments across different assets, sectors and geographies to reduce risk. Often called the only free lunch in investing.

Diversification reduces portfolio risk by spreading investments across assets that do not all move together. When one asset class falls, another may rise, softening overall portfolio losses.

In mutual funds, you automatically get diversification within the fund (20-50+ stocks).

Related terms

• Asset Allocation — How you distribute investments across asset classes — equity, debt, gold. The single biggest factor in long-term portfolio returns and risk.
• Concentration Risk — Risk from over-exposure to a single stock, sector or theme. High concentration amplifies both gains and losses.

Browse the full mutual fund glossary, or see this concept in action in the fund screener.