Safety of Mutual Funds

  • Print this article

Mutual funds are a type of investment that many investors and experts consider relatively safe. A mutual fund is an investment vehicle in which investors can buy shares of ownership in a group of assets like stocks or bonds. The value of the mutual fund shares is based on the value of the assets that make up the fund. While they are safer than investing in an individual stock, risks still exist and careful considerations must be made. These funds provide diversification and are regulated closely by the Securities & Exchange Commission.

  1. Features

    • Mutual fund investments involve buying shares of a large portfolio of securities. A fund manager is in charge of the portfolio and is the individual responsible for buying and selling securities. The group of investors in the fund are those who benefit from the capital appreciation of the underlying assets as well as from dividends or interest that is generated. You can invest in mutual funds with many different strategies and objectives, depending on your investment criteria.

    Diversification

    • One of the ways that mutual funds provide safety is through diversification. Most individual investors do not have the amount of money that it would take to buy enough securities to create a diversified portfolio. Mutual funds control a large amount of money, and the managers of the funds can afford to buy thousands of different securities. These fund managers can diversify the portfolio by purchasing different stocks, bonds or even shares of other mutual funds. This way, even if one of the underlying investments does not perform well, the portfolio can still generate returns.

    Regulation

    • Mutual funds are regulated closely by the Securities & Exchange Commission. Each mutual fund company has to abide by these rules to be able to continue offering shares to the public. For example, mutual fund managers cannot use large amounts of leverage in the same way as hedge fund managers to amplify returns. As an investor, this means that you do not have to worry about the risk that comes with additional leverage. Since the SEC checks all the moves made by mutual fund managers, you can feel more confident that these moves are in your best interest.

    Misconceptions

    • Many investors mistakenly believe that there is some type of guarantee on a mutual fund investment. When you put money into a mutual fund, you could potentially lose the entire amount that you invest without any guarantees. This means that you should invest only money that you can afford to lose if things go badly. Another popular misconception is that the diversification prevents you from losing money. While diversification is a good long-term risk management strategy, it isn't foolproof. The fund manager could still build a portfolio of companies that perform poorly, and you could lose money.

    Considerations

    • Even though mutual funds are considered fairly safe compared to individual stocks, they still present some risks. If a fund performs poorly, by the time you add in the expense ratio that is charged you could end up losing money for the year. Careful research is necessary to minimize risk in mutual funds. By looking at the investment returns and the individual investment strategy of each fund, you can often increase the safety of your investment.

Related Searches

References

Comments

You May Also Like

  • Safety Rating of Mutual Funds

    Unlike bonds and insurance companies (for which there are ratings agencies), mutual funds are rated in terms of quality and performance rather...

  • Are Mutual Funds Safe to Invest In?

    Many variables influence the safety of any financial investment, including mutual funds. But realizing that with great returns comes great risk is...

  • Are Money Market Mutual Funds Safe?

    Although money market funds carry no Federal Deposit Insurance Corporation insurance, they are considered very safe investments. Money market accounts held at...

  • Money Market Vs. Mutual Funds

    Money market funds are mutual funds that invest in money market instruments such as certificates of deposit, banker's acceptances, commercial paper, U.S....

  • Considerations in Managing a Bond Portfolio

    Managing a bond portfolio is a balancing act of achieving optimal yield, ensuring investment safety and guarding against potential bond value fluctuation....

  • How to Find Safe Investments Today

    Let's be clear about one fact: "There is no such thing as a perfectly safe investment." There are, however, a number of...

  • Mutual Fund Strategies

    Mutual Fund Strategies. In essence, a mutual fund is a basket of investments that is built with the money of many investors....

  • Return on Investment for Employee Safety Programs

    According to Hospital & Health Networks, more than 250,000 health care workers are injured every year at work, and more than $20...

  • About Hartford Mutual Funds

    The Hartford Company can be considered a matured, solidified company. Most of the time--with the mere mention of their name--life insurance usually...

  • Safety of Vanguard Money Market Funds

    Vanguard offers nine money market funds. Five of them invest in the short-term obligations of the state governments of California, New Jersey,...

  • How to Gauge Your Total Return On Mutual Funds

    Your Net Asset Value (NAV) is the key to how to gauge your total return on mutual funds. Unfortunately, the NAV is...

  • Mutual Fund Complex Definition

    A mutual fund complex is a family of mutual funds. Mutual funds are a diversified investment product that makes it possible for...

  • The Features of a Mutual Fund

    Mutual funds are financial intermediaries that pool financial resources from individuals, companies and institutions and use the collective resources to invest in...

  • Mutual Fund Risk Analysis

    Like all investments, investing in mutual funds involves risks -- the possibilities that a fund fails to achieve the expected return or...

  • About Precious Metals Mutual Funds

    Diversification, or spreading your risk among a variety of different investment options, may be the best advice any broker ever gave. Americans...

  • How Safe Are Money Market Funds?

    People with money to invest often look for safe investments that yield a good return. Money market funds provide a lower risk...

  • How to Calculate a Margin of Safety

    Subtract the P/E multiple for the company from the average P/E multiple for the industry. You can find industry P/E ratios on...

  • The Average Return for Assest Allocation Fund Vs. Mutual Fund

    Stocks are the asset class with the highest annual returns historically. Over a 60-year time frame, the stock market has provided average...

Related Ads

Featured
View Mobile Site