Why are mutual funds considered a diversified investment?

Mutual funds are considered a diversified investment primarily because they hold various types of financial assets. This diversification allows investors to spread their risk across a broad range of securities, which can include stocks, bonds, and other financial instruments. By having a mix of different assets, mutual funds can reduce the impact of any single asset's poor performance on the overall portfolio.

For example, if one particular stock within a mutual fund declines in value, the effects of that decline can be mitigated by gains from other stocks or assets within the fund. This characteristic of mutual funds makes them an attractive option for investors who wish to achieve a diversified portfolio without having to individually select and manage a large number of individual stocks or bonds, which can be time-consuming and complex.

The other options do not accurately describe the nature of mutual funds. Investing solely in high-risk stocks does not contribute to diversification; rather, it concentrates risk. Being guaranteed to earn a profit is misleading, as mutual funds can fluctuate in value and are not risk-free. Lastly, mutual funds are typically managed by a team of professionals rather than a single individual, which further enhances their ability to diversify investments effectively through various strategies and insights.