Consider this: There are more than 8,000 mutual funds in the financial marketplace, according to the Investment Company Institute, the trade group for the mutual fund industry. About 60 percent of these funds are stock funds, with the rest being "hybrid" or "balanced" funds (which invest in a mix of stocks and bonds), taxable bond funds, municipal bond funds, and money market funds.
With such a large number of funds available, and with a finite amount of stocks, bonds and other securities in which these funds can invest, it's easy to see that there is going to be considerable duplication among many of these mutual funds - and duplication is the opposite of diversification.
Consequently, when you invest in mutual funds, you can't just adopt a philosophy that can be boiled down to "the more, the merrier."
Furthermore, it isn't just a matter of one "large-cap growth" fund looking like another. You might find that the large-cap fund (a fund that invests in stocks of large companies) is also quite similar to a "technology" fund.
So, what's the solution to avoiding "overlapping" funds? There's no magic formula - you have to do your homework. Before purchasing a new fund, look closely at its holdings, which will be posted on the fund's prospectus. (Also, while you're looking at the prospectus, make sure you understand the fund's investment objective, risk, charges and expenses.) Then compare these holdings to the ones listed on your existing mutual funds - if you see too many redundancies, you may want to take a pass on this particular fund.
Ultimately, your first step in diversifying a mutual fund portfolio is to identify your individual risk tolerance and investment objectives. Are you a conservative, moderate or aggressive investor? Do you need growth, income or a combination of both?
Once you've answered these questions, you can then begin selecting the right mix of mutual funds to help you achieve your financial goals. Of course, with all the variables involved, both in your personal situation and in the funds themselves, you may want to enlist the help of a professional financial advisor - someone with the experience to help you choose those funds that are right for you.
Many people have successfully incorporated mutual funds into their investment strategy - and with the proper effort and assistance, you can too.
Carmack Kersey, an Edward Jones investment representative, may be reached by calling 744-1776.