How to Diversify Mutual Funds

Mutual funds provide instant diversification because they represent ownership in many different companies. But simply buying one mutual fund might not provide enough diversification for your portfolio. Each mutual fund focuses on a specific part of the market, and diversifying across many different sectors of the market can protect you in the event of a downturn. Building a diversified portfolio of mutual funds means looking at your needs and choosing the funds that best meet those needs.

Step 1

Request an annual report for each of the mutual funds you already own. You should receive an annual report from the fund automatically. If you do not, contact the fund company to request one.

Step 2

Review the list of stocks held by each mutual fund. If you own more than one stock mutual fund, you might find that two or more of the funds own a lot of the same stocks. That lowers your level of overall diversification by duplicating what you own.

Step 3

Review the sectors of the mutual funds you own. If you own mostly large cap stock funds, consider adding a quality small cap and mid cap stock fund as well. You can also purchase a total stock market index fund to get further diversification. This type of fund purchases all of the stocks in the U.S. market, including small cap, mid cap and large cap stocks.

Step 4

Contact several mutual fund companies and request a prospectus for their international index funds and managed international funds. Diversifying your money internationally can be a smart move, since international markets often rise when domestic markets fall.

Step 5

Calculate your asset allocation by adding up all the money you have to invest and the amount of money you have in stocks, bonds and fixed income investments. Consider how much you want to invest in each category and then seek out a mutual fund that invests in that type of asset. You can, for instance, choose bond mutual funds and money market funds to diversify your holdings and reduce your exposure to the stock market.

the nest