# Diversification and index funds > What is an index fund, why owning a little of everything beats betting on one company, what diversification can't protect against, and what to check before buying. - Course: [Personal Finance: Budget, Safety Cushion, Debt and Investing](https://productovi.com/courses/personal-finance.md) - Module: How to invest without illusions? - Lesson 22/32, ~15 min - Source: https://productovi.com/courses/personal-finance/diversification-and-index-funds ## One company or the whole market **Alex Tutor:** You keep helping Dana invest, and a colleague has given her some advice. **Dana:** A colleague says skip funds: just buy shares of one big tech company everyone uses. "It's not going anywhere." Sounds reasonable? **Alex Tutor:** Big companies do go somewhere: some halve in a year, some disappear over a decade. With one company, one piece of bad news hits all of your money. **Alex Tutor:** **Diversification** means spreading money across many investments so that one failure can't sink the plan. Picture 50,000 split equally across 500 companies, and one of them goes bankrupt. **Sofia:** With one company, all 50,000 would be at stake. > **Exercise:** 50,000 UAH is split equally across 500 companies. One of them goes bankrupt and its shares become worthless. **How much is lost?** In UAH. ## What is an index fund? **Dana:** 100 hryvnias lost instead of 50,000. But I can't buy 500 companies myself. **Alex Tutor:** That's what an **index fund** is for: a fund that holds every company in an index, in the index's proportions, instead of choosing which ones to buy. An index is a list of companies chosen by fixed rules, say the largest companies of a country or of the world. **Alex Tutor:** Nobody in the fund tries to guess winners. That makes it boring and cheap: fewer people to pay, so the yearly fee is usually low. We'll see why that matters a lot in the next lesson. **Sofia:** So with one purchase Dana owns a small slice of hundreds of companies. > **Exercise:** Which description fits an **index fund**? ## What diversification can't do **Dana:** Then an index fund is safe. Five hundred companies can't all fall at once. **Alex Tutor:** They can, and they do: that's the −28% year from the last lesson, which was an index fund. Diversification removes the risk of one company. It doesn't remove the risk of the whole market falling. **Alex Tutor:** For that you spread in two more ways: across kinds of assets, like shares plus bonds plus cash, and across time, by buying a little every month instead of all at once. **Sofia:** Dana's 3,000 a month already does the second one. **Alex Tutor:** Yes. **Regular investing** means some months buy high and some buy low, and nobody has to guess the right moment. > **Exercise:** **True or false:** because an index fund holds hundreds of companies, it can't lose a quarter of its value in one year. ## Five funds, one bet **Dana:** To be extra safe, I could buy five different index funds. **Alex Tutor:** Only if they hold different things. Five funds that follow the same big companies are one bet bought five times, with five sets of fees. Look at what's inside, not at the number of names. **Sofia:** Same with ten companies from one industry: if that industry has a bad decade, all ten suffer. **Alex Tutor:** Right. And Dana's job is one more concentration: her income depends on the tutoring market. Her savings don't need to bet on it too. > **Exercise:** Which choices **really** spread Dana's risk? Select all that apply. ## Before buying, in Ukraine **Dana:** Fine, I'm convinced. How do I actually buy one from here? **Alex Tutor:** As of September 2026, foreign funds are bought through Ukrainian licensed brokers, within monthly currency limits the central bank eased in August 2026. The choice available locally is still narrow, and the rules keep changing. **Alex Tutor:** Check any broker in the securities regulator's public licence register before sending money. Gains are taxed too: as of September 2026, 18% income tax plus the 5% military levy on investment profit. **Sofia:** So there's an order: cushion and short goals first, then the checks, then the monthly purchase. > **Exercise:** Put Dana's steps before her first index-fund purchase in a sensible order. ## Your turn: answer the colleague **Dana:** My colleague will ask again tomorrow. I want a friendly answer, not a lecture. **Alex Tutor:** Then two or three sentences: what happens to 50,000 if one company fails, why a fund solves that, and the one risk a fund doesn't solve. **Sofia:** Without saying the company is bad. It might do great. **Alex Tutor:** Exactly. The point isn't that the company will fail; it's that nobody knows which one will. > **Exercise:** Write Dana's friendly reply to the colleague who says "just buy one big company" (2–3 sentences): what happens to 50,000 if one company fails, why an index fund helps, and the one risk it doesn't remove. > **Key ideas** > > - **Diversification** spreads money so one failure can't sink the plan: 50,000 across 500 companies loses 100 if one goes bankrupt, not 50,000. > - An **index fund** holds every company in an index, in its proportions, without picking winners, usually at a low yearly fee. > - It removes the risk of one company, not of the whole market: an index fund can still have a −28% year. Spread across asset kinds and over time (regular monthly buying) as well. > - Five funds holding the same companies are one bet with five sets of fees. Look inside. > - As of September 2026, foreign funds are bought through Ukrainian licensed brokers within monthly currency limits; check the broker in the regulator's register, and remember tax on gains. This is educational, not personal financial advice. **Alex Tutor:** Next: the fee. Why 2% a year sounds small and isn't. - Previous lesson: [Risk and return: no "high and safe"](https://productovi.com/courses/personal-finance/risk-and-return.md) - Next lesson: [Expense ratio: what 2% a year costs](https://productovi.com/courses/personal-finance/fees-and-time.md) --- Productovi Learning. Free, no sign-up needed to read.