Final answer:
It is true that investing in various mutual funds can reduce diversification costs, allowing access to diversified portfolios managed by professionals, thereby balancing risk and potential returns.
Step-by-step explanation:
It is true that one way to reduce your diversification costs is to invest in various mutual funds. Mutual funds offer a way for investors to gain a diversified portfolio without the need to individually buy stocks or bonds from a wide range of companies. By pooling money from many investors, a mutual fund can spread its holdings across numerous different assets, thereby spreading risk and potentially lowering the costs associated with trying to diversify one’s own portfolio.
Diversification is key in investing, as it follows the proverb "Don't put all your eggs in one basket." By investing in mutual funds, individuals have access to professionally managed portfolios that are designed to balance risk and return. This can provide increased expected returns without the level of risk that would be involved in holding just a few individual securities.