The Risk Behind Mutual Funds2 min read
The investment business is based on risk, and mutual funds are no exception. Whether you invest in bonds, stocks, or mutual funds, you may face losses due to changes in the economy, political instability, or market volatility. There are many specific risks associated with mutual funds, including the possibility of the fund issuer defaulting on its debt or falling into bankruptcy. Also, liquidity risk is a significant concern, as it may be difficult or impossible to sell a security at a fair value based on market volume.
While all investments carry a certain amount of risk, mutual funds often have inherent diversification. By pooling the risks of many companies, mutual funds have a low level of risk compared to investing in individual stocks. Actively managed funds, however, are more expensive than passively managed ones. A good mutual fund should be able to track several different companies without losing a great deal of money. Mutual funds, unlike individual stocks, offer you a diversified investment portfolio without the headache of monitoring dozens of assets.
In 2015, 76% of investors had a risk tolerance discussion with their advisors and were satisfied with their advice. Although mutual funds are not insured, their assets are held by a third-party custodian. Additionally, they are subject to the annual review of their financial statements by an independent auditor. If you have concerns about your investment risk, consider consulting an investment advisor at BlueShore Financial. In addition to understanding the risks associated with mutual funds, it is also important to know which type of fund will suit your needs and your goals.
Stocks and bonds carry different risks. A mutual fund may include both stocks and bonds, but stocks have the potential for higher returns in the long term. Some stocks pay dividends, which cushion the blow of share price declines and provide additional funds for purchasing more shares. Bonds, on the other hand, tend to fluctuate less and provide income stability. However, investing in stocks and bonds requires careful analysis of the risk involved. If you want to reduce your risks, you should diversify your portfolio.
Expenses are another source of potential costs. Mutual funds charge annual fees, often expressed as a percentage. These costs are outlined in the prospectus. While they may not be directly visible to investors, they are essential to the overall financial health of mutual funds. This is where the expense ratio comes in handy. Moreover, mutual funds are also criticized for high expenses. While they are often transparent, there is no way for investors to eliminate them completely.
Mutual funds are an easy way to invest in a broad range of companies without having to do the research or worry about getting ripped off. You can buy and sell shares at a discount, and mutual funds also allow you to use professional money managers who know the ins and outs of the market. By investing in mutual funds, you’ll get a full-time manager who’s able to invest your money wisely.