Final answer:
Diversification in investment refers to the practice of purchasing a variety of stocks or bonds from multiple companies to mitigate risk. This concept is embodied in mutual funds, which allow investors to spread risk and balance portfolio performance. Diversification aims to cancel out extreme fluctuations in the value of individual investments.
Step-by-step explanation:
The process of bringing together similar stocks from different sources refers to the concept of diversification in investment. In the context of mutual funds, diversification involves buying a variety of stocks or bonds from numerous companies rather than investing all funds in a single entity.
This investment strategy is guided by the principle of not putting all your eggs in one basket, aiming to mitigate the risks associated with the potential ups and downs of individual investments. By diversifying, the investor can balance out the performance of the portfolio, offsetting extreme increases and decreases in value.
Mutual funds inherently offer diversification, since they pool money from different investors to purchase a broad mix of stocks, bonds, or other securities.