Diversification
The principle of diversification in investing refers to the practice of spreading money across a variety of investment types with an eye toward balancing market ups and downs and thus reducing overall risk.
Mutual funds are an excellent vehicle for diversification since they are set up to buy multiple stocks - sometimes in the hundreds or thousands. Many investors feel that by putting their money in mutual funds they achieve the most basic goal of diversification - buying multiple stocks - but relieve themselves of the necessary research and market acumen to individually pick those stocks. That task falls to the fund manager and the associated staff of researchers.
It is also possible, by buying shares in more than one mutual fund, to achieve even greater diversification by selecting a variety of sector, capitalization, and other specialty funds. In the strategy of owning shares in more than one fund it is important to avoid fund overlap (funds that buy shares in the same stocks) as this may actually decrease the investor's overall rate of return.
More Terms Explained here