What Is a Diversified Fund?
A diversified fund is an investment fund that is broadly invested across multiple market sectors, assets, and/or geographic regions. It holds a breadth of securities, often in multiple asset classes. Its broad market diversification helps to prevent idiosyncratic events in one area from affecting an entire portfolio.
Index funds are prime examples of diversified funds, although diversified funds need not track an index and may be actively managed. Moreover, an equity index fund, for example, is only diversified within the universe of stocks and does not hold other assets like bonds or commodities. A diversified fund can be contrasted with specialized or focused funds, such as sector funds, which focus on stocks in specific sectors such as biotechnology, pharmaceuticals, or utilities
- Diversified funds refer to pooled investments that build portfolios across several asset classes, regions, and/or industry sectors.
- Diversification is a key investment strategy for reducing systematic risk in a portfolio while maintaining levels of expected return.
- Diversified funds can range in focus from passive indexed funds that replicate broad indices to actively managed funds that invest broadly.
Understanding Diversified Funds
Diversified funds primarily seek to mitigate idiosyncratic or unsystematic risk by investing in a broad array of securities across multiple market sectors or geographic regions. Diversified funds may also choose to manage stocks across multiple countries. A multi-regional fund also investing in multiple sectors would be one of the market’s most broadly diversified funds. Diversified funds can also invest across multiple asset classes to help spread risks even more. With a multiple asset class portfolio, managers can also seek optimization of returns.
Overall, diversified funds are mindful of both unsystematic and systematic risks. They seek to mitigate these risks through their broad diversification. Since unsystematic risks are often sector-specific they can be alleviated by multi-sector investing. Funds broadly diversified across regions may also be able to manage against some market-wide systematic risks that are inherent to a particular country or region.
Investors choose diversified funds for several reasons. Conservative investors may seek diversified funds because they offer a lower risk of concentrated losses without sacrificing expected returns. Diversified funds are thus also often optimized for a balance that gives investors the highest return for their risk.
Diversified Fund Investing
Generally, all funds offer diversification by investing in a broad array of securities. Investment funds in general will help investors diversify the idiosyncratic risks that can affect one security or a group of securities in a specific sector. When seeking diversified funds, investors may need to closely consider the types of risks they wish to mitigate or exposures they wish to retain.
Broad market index funds can be one type of diversified fund, offering low costs with broad market diversification. The Wilshire 5000 Index Fund (WFIVX) for example, seeks to track the return and holdings of the Wilshire 5000 Index. The Wilshire 5000 Index represents the entire U.S. equity investable market. Therefore, investors have exposure to the full range of U.S. market sectors and capitalizations. It will however be subject to the overall systematic market risk affecting U.S. companies in general.
A globally diversified index fund can offer mitigation of unsystematic risk and some systematic risks associated with markets in individual countries. The Vanguard Total World Stock Index Fund is one example. The Fund seeks to track the holdings and performance of the FTSE Global All Cap Index. It includes developed and emerging market stocks across all market sectors and capitalizations.
A balanced fund is a mutual fund that typically contains a component of stocks and bonds. A mutual fund is a basket of securities in which investors can purchase. Typically, balanced funds stick to a fixed asset allocation of stocks and bonds, such as 70% stocks and 30% bonds, or 60/40, etc.
Actively Managed Funds
Vanguard and JPMorgan offer some of the industry’s top actively managed diversified funds.
Vanguard Diversified Equity Fund: The Vanguard Diversified Equity Fund invests in eight actively managed U.S. stock funds for diversification. Through the underlying funds, the Vanguard Diversified Equity Fund seeks to offer diversification across growth, value, and capitalization. The Fund’s top underlying holding is the Vanguard Growth and Income Fund.
JPMorgan Diversified Fund: The JPMorgan Diversified Fund invests in a diversified portfolio of equity and fixed-income investments. The Fund invests in both underlying funds and individual stocks.