Mutual funds WILL diversify your portfolio.
If there is one lesson learned from this recent global financial crisis, it is the importance of having a diversified portfolio. There is one investment vehicle that will diversify your portfolio automatically. Commonly referred to as mutual funds, these investments will pool together your money, and money from other members, and diversify the mutual fund’s holdings by purchasing different investments along different asset and risk classes.
Are There Any Options with Mutual Funds?
Mutual funds come in a wide variety of options to suit all investor types. There are safe investments such as bond mutual funds and T-bill mutual funds, and other securities and stock investments found within an equity mutual fund. However, one of the more popular mutual funds originated from the historic 1987 stock market crash. Commonly referred to as a balanced mutual fund, these funds invest in both bonds and equities. Balanced mutual funds allow investors to benefit from an investment approach that maximizes returns within a given market. If the economy is strong, and equities are rising, then the mutual fund manager will increase the fund’s investments in equities. Consequently, if equities aren’t performing as well, and bonds are, the fund manager will move more towards investing in bonds. Almost all balanced funds, and equity funds for that matter, hold a portion of their investments in cash.
How Should You Decide Which Mutual Fund?
Mutual funds are designed to produce significant returns over time. They compensate for losses in one investment, with gains in others. Overall, the mutual fund should produce a competitive and steady rate of return. Because its approach is long-term, it is best to make sure you are aware of your risk tolerance. Switching back and forth, from one mutual fund to the next, will never produce the kind of returns you are looking for. Instead, make sure to be aware of your risk tolerance and choose a mutual fund that meets your long-term growth aspirations.
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“Ultimate guide to retirement: What are the advantages of mutual funds?.” Business, financial, personal finance news – CNNMoney.com. N.p., n.d. Web. 7 Dec. 2010. http://money.cnn.com/retirement/guide/investing_mutualfunds.moneymag/index3.htm.
Gould, Carole. “Mutual Funds; Drawbacks to Asset Allocation – New York Times.” The New York Times – Breaking News, World News & Multimedia. N.p., n.d. Web. 8 Dec. 2010. http://www.nytimes.com/1991/06/23/business/mutual-funds-drawbacks-to-asset-allocation.html.