Investors are always looking to grow their money, and mutual funds have traditionally been a popular way for investors to accomplish that goal. By investing in a mutual fund, you are looking to pool your investment with others, as well as take advantage of professional money management. Mutual funds can be an excellent tool for mitigating risk in you portfolio, as well as diversify your investments.
Although mutual funds can serve to act as a hedge against risk, there is still the possibility that they could lose value in both the near and long term. If you are looking for a secure investment you may be wondering, “does a safe mutual fund exist?” That is a good question, and the answer is well, “it depends”. I know that is probably not what you would want to hear. Allow me to elaborate.
As with every type of investment you must first do your homework when it comes to mutual funds. Take a look at not only the mutual fund’s past performance, but also the fund’s holdings, manager as well as the tenure of the manager at the fund. These can provide you with valuable incite into the “safety” of the fund, although it will ultimately be no guarantee that the fund is totally safe.
It is also crucial that you have realistic expectations, as mutual funds are ultimately tools that invest in the stock market, and will fluctuate in value.
Is There a Safe Mutual Fund? What Is The Meaning Of “Safe”?
If by safe you mean, will the mutual fund run off with all of your money, then in that respect they are safe. As long as you are not investing offshore, mutual funds should be heavily regulated to protect your money from fraudulent activity.
It all depends on how you define “safe”. If you think as safe as a 100% guarantee free of any risk, then there really is no safe mutual fund. However, if you view safe as having an excellent chance of returning relatively stable returns over the long term, then safe mutual funds do exist.
Generally speaking blue chip stocks are the lowest risk stocks to invest in. These are stocks is well established companies with a high market capitalization. Mutual funds that invest in these stocks are likely to be a lot safer than fund that invest in riskier growth stocks.
It is absolutely imperative that you understand the value of a stock can go down as well as up. As mutual funds often invest in a group of stocks, the value of the mutual fund will go up and down daily. Financial markets can be volatile, large fluctuations can occur in the short term. If you are investing for the long term, it’s important not to panic at the short term volatility.
It’s All About The Timing
The timing in which you invest you also have a big effect on the safety of investing in mutual funds. If you invested in the middle of the 2008 financial crisis, where banks were running out of cash, the financial word was in chaos and stock prices were extremely volatile then this would be a lot riskier than investing when the economy had been stable for many years. That is, as long as a big bubble hadn’t been formed.
We can never know the exact best time to invest, or the safest mutual fund to invest in. However, we can research a mutual fund by looking at the past performance and comparing it with the related indexes. We can also try not to invest at the top of a big bubble. By doing these two factors, we can invest in mutual funds relatively safely over the long term.