How to Invest In Absolute Return Mutual Funds

Stock and bond markets go up and down, creating fluctuations that can be uncomfortable for nervous investors. Absolute return funds focus on providing steady gains, without regard to the movement of the stock and bond markets. Often, absolute return funds are compared to hedge funds that are frequently aimed at high-net-worth investors. If preserving capital is your primary investment goal, absolute return funds may suit you.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Internet access
• Money to invest

Instructions

1. Understand absolute return fund strategies. Absolute return funds are actively managed, using a variety of strategies. These include focusing on a specific type of investment or several, using derivatives, leveraging to accomplish goals, and both long and short positions.

2. Realize that there are two absolute fund structures. The manager of the fund can invest in other funds or the manager may invest directly into securities.

3. Be aware that each absolute mutual fund is different and may include investments in stocks, bonds, options, futures and real estate securities. Mortgages, money markets, currencies, derivatives, metals, swaps and other instruments may be included in absolute return funds as well.

4. Recognize that absolute return finds are considered riskier than traditional funds. This is due to the frequent use of leverage in investing. On the other hand, absolute return funds often have less dependence on traditional asset classes, reducing the overall level of risk in a portfolio.

5. Use the Internet to research absolute return funds. Such sites as Morningstar and Fidelity (find links to both sites in the Resources section below) provide facts about available mutual funds and tools for comparing them.

6. Request and review prospectuses from any absolute return funds in which you are interested. Learn the strategies each fund manager will use in pursuing the fund's objectives.

7. Ask your broker, financial planner, or agent to explain what you can expect from absolute return funds, where they fit in your portfolio, and what risk level you can expect before you purchase shares. Alternatively, you may contact the mutual fund directly for information.

Tips & Warnings

• An absolute return fund may be right for you if you want to diversify into non-traditional investments, obtaining returns without regard to market fluctuations. It may also be a wise choice if you hope to realize income and capital appreciation.
• The risk profile of an absolute return fund is dependent upon both the strategy employed by the fund manager and the fund's underlying investments. You can find absolute return funds with risk profiles ranging from highly conservative to aggressive.

Resources

• Visit the Morningstar, Inc. site by clicking here.
• Visit Fidelity's Web site by following this link.