One of the most advantages of investment is the reduction in capital risk by diversification. An investment in a single equity may do well, but it may collapse for some reasons. If your money is invested in such a failed holding you could loose your capital. By investing in a range of equities (or other securities) the fund risk is reduced. The more diversified your revenue, the lower the fund risk. This principle is often referred to as spreading risk. Collective investments by their nature tend to invest in a range of securities. However if the securities are all in a similar type of asset class or market sector then there is a systematic risk that all the shares could be affected by adverse market changes. To avoid the systematic risk, the investors may diversify into different non perfectly-correlated asset classes. For example, investors might hold their assets in equal parts in equities and fixed income securities. If one investor were to buy a large number of direct shares, the amount they would be able to invest in each holding is likely to be small. Dealing costs are normally based on the number and size of transaction, therefore the overall dealing costs would take a large chunk out of the capital. investment

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