What is a 'Diversified Common Stock Fund'

A diversified common stock fund is a particular type of mutual fund that seeks to invest its assets in a relatively large number and variety of common stocks. A diversified common stock fund tends to comprise a portfolio of stocks in the range of 100 or more issues. These funds will often include large cap, mid cap and small cap company sizes. They will reflect a combination of value, growth, and blended investment styles. 

BREAKING DOWN 'Diversified Common Stock Fund'

A diversified common stock fund manager has the advantage of not being limited by company size or investment style when making their investment selections. Portfolio composition usually includes common stock issued by blue chip and other reputable and stable companies of different market capitalizations. Diversified common stock funds allow fund managers to use a variety of investment strategies, as long as the investments remain exclusively in shares of common stock. 

There are several variations of diversified stock funds. For example, the growth of the exchanged-traded fund (ETF) market has some investors grouping certain ETFs with common stock funds. The structure of the investment company is largely irrelevant, whether a mutual fund or an ETF, the underlying assets are the same—common stock. 

With index funds, investors buy and hold shares of stock designed to track a stock index, such as the S&P 500®. However, many stock funds, structured both as mutual funds and ETFs, use indices with fewer companies and less diversity. For example, the Dow Jones Industrial Average is much more select than the S&P 500 and includes only 30 companies.

Other common stock funds focus entirely on a specific sector or region of the world. Some funds invest only in technology-oriented companies, while others invest only in emerging markets. An increasing number of ETFs invest only in common stocks, many of which hold assets in one sector.

Diversified Common Stock Funds and Diversification

Diversified common stock funds intend to offer investors variety as a way to mitigate investment risk. Diversification is a type of risk management strategy that brings into play several different investments across an investor’s portfolio. The idea is that a portfolio that includes different kinds of investments and across different time horizons will, on average, yield higher returns and pose less risk than any individual investment found within the portfolio. Overall, diversification strives to level out unsystematic risk events in a portfolio so the positive performance of some investments effectively neutralizes the negative performance of others in the portfolio. 

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