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What on earth is diversification? This is a method of reducing risk in your investment portfolio. To put it simply, it means not having all your “eggs” in one basket.
By dividing your investments among different assets, you are reducing your overall risk. When you invest in a single asset class, for example equities, there is a potential for higher returns, but this is extremely risky. There is no guarantees with equities, and if the particular equities invested in suffer a loss, you also suffer that loss and could lose everything. On the other side of the coin, investing purely in deposits will give no significant return, but your capital is safe and secure. Diversification is attempting to get the best from both worlds.
Investment funds can be a great way of achieving diversification. It takes all the hard work out of diversifying your investment by doing it for you. Your investment is ‘pooled’ with other investors, this increases the overall investment amount, making it easier for the fund managers to diversify these funds across different assets. This style of investments allow investors to participate in equity returns, while minimizing the risk if these equities were to ‘go south’.
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