As we have seen in our article on speculation in the “Basics” section, any decision (to invest) contains an element of speculation unless it is absolutely certain that what we expect will actually occur. And speculation always involves risk.
We have also seen that a key function of an investment fund is precisely to reduce the risks linked to investments by diversifying investments over a fairly large number of different assets. The principle is simple: The more diverse the portfolio of an equity fund, for example, the greater the chance that a decline of the price of one equity is compensated by a rise of another stock. This is why an investment fund is primarily a medium and long-term savings vehicle.
However, it is also quite possible to use investment funds to bet on short-term market trends.
To do this, one must choose funds that invest in very specific markets, which are also quite volatile and offer a serious potential for appreciation. This can be an equity fund that specializes in selected sectors such as biotechnology, the pharmaceutical industry or new technologies, but just as well a fund that focuses on specific regions, such as developing countries.
But beware, in order to lend itself to speculation, a fund must above all be poorly diversified. The principle of risk diversification is a double-edged sword:
If the chance is great that in a highly diversified portfolio the decline in price of one security is offset by the rise in price of another one, the probability that the rising price of a security is offset by the falling price of another one is real as well. Which means: The higher the diversification of a portfolio, the more the potential to realize speculative gains is limited.