If a mutual fund is already a form of diversification, why is it important to also diversify your investments into different mutual funds?

Answer 1

While a mutual fund provides some level of diversification, it may not be enough for a well-rounded investment portfolio. Investing in different mutual funds helps to spread out the risk and increase the diversification of your portfolio. Different mutual funds may have different investment strategies, geographical focuses, and asset classes, which can help to minimize the impact of market fluctuations on your investments. Additionally, investing in multiple mutual funds ensures that you are not heavily invested in one particular asset or sector, which can lead to significant losses if that asset or sector underperforms. Overall, diversifying your investments across different mutual funds is an important strategy for managing risk and maximizing returns.