What Is a Diversified Common Stock Fund?
A diversified common stock fund tends to comprise a portfolio of stocks in the range of 100 or more issues. These funds often include large-cap, mid-cap, and small-cap company sizes. They will reflect a combination of value, growth, and blended investment styles.
- A diversified common stock fund is an investment fund type 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 and often includes large-cap, mid-cap, and small-cap company sizes.
- Diversified common stock funds usually reflect a combination of value, growth, and blended investment styles.
- The managers of diversified common stock funds can use a variety of investment strategies, so long as the investments remain exclusively in common stock shares.
- Diversified common stock funds intend to offer investors variety as a way to mitigate investment risk through diversification.
Understanding a 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, so 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.
It is important to pay attention to the expense ratio of a fund, which is the cost of investing in the fund that will impact an investor's total return.
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 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.
What Is a Common Stock Fund?
A common stock fund is an investment fund that invests in the common stock of public companies. Common stock is the stock of a company that comes with no special privileges, such as guaranteed dividends or preferred creditor status. Common stock is subordinate to preferred stock. Common stock funds provide investors with diversification, lower costs, and time-savings on research.
What Are Some Advantages of a Diversified Common Stock Fund?
The primary advantage of a diversified common stock fund is diversification. Diversification is a key tenet to investing that helps investors reduce the risk in their portfolios. Diversified common stock funds tend to invest in hundreds of stocks. In addition, because common stock is subordinate to preferred stock, common stock funds can come with lower fees.
What Is the Relevant Risk Measure for a Stock to Be Added or Held in a Well-Diversified Portfolio?
The relevant risk measure is standard deviation. Standard deviation helps to determine the risk of an investment and is the standard deviation of the rate of return, which can demonstrate the volatility of an investment. The measure provides details on how an investment can impact a portfolio to determine whether it should be added, held, or sold.