What are the risks of a mutual fund?
There are several risks. The main one is that the companies in which the fund has invested will perform poorly, suffer mismanagement or otherwise meet with misfortune. Another big risk is that some economic, political or other development will cause the overall market to fall, dragging down with it the holdings of your particular fund. These are risks you would face investing in individual stocks as well; at least mutual funds can offer diversification. But some risks are unique to mutual funds. The fund management, for instance, may be doing things you don’t know about or wouldn’t like if you did. What you think is a plain vanilla domestic equity-income fund might, in order to boost returns, invest in derivatives, invest overseas, or invest in growth companies that pay little or no dividend. In a downturn, you could be in for an unpleasant surprise. There is also the risk that the fund will under perform a benchmark index, which means that management fees aren’t buying any added value
Related Questions
- What other funds in the current plan lineup are closed to new investors? Will any of the closed funds be available to participants who invest in the new self-directed mutual fund window?
- What if my clients want to sell a portion of their pledged Franklin Templeton mutual fund shares?
- What is the difference between a mutual fund and a stock?
