How Can A Mutual Fund Reduce An Investor's Risk?

How can a mutual fund reduce an investor's risk? A great fund manager lowers the risk for the investors. A mutual fund is an investment vehicle that accepts money from various investors and creates a large...

A mutual fund is an investment vehicle that accepts money from various investors and creates a large pool. This pool is managed by an investment group, usually with a manager to direct the mutual fund towards its objectives. A mutual fund's assets can include stocks, bonds and other securities in varying percentages. These assets vary based on the goal of the fund, whether it is for secure income or rapid growth in high-risk areas. Research the objective of the fund to determine if it is targeting the right area for you.

Mutual funds are great vehicles for reducing an investor's risk. When you join a mutual fund, you are purchasing a share or portion of the fund, making you a shareholder. Being a part of the fund gives you access to a variety of stocks and bonds that you may not be able to purchase on your own. "A fund reduces risk because it is diversified. (Diversification is one of the best ways to manage risk in investing, since you are holding more than one security and not tying your fortunes to one stock or bond or other security,)" said Michelle Smith, managing director of the Mutual Fund Education Alliance. This diversification is critical in keeping risks in check. Because so many different types of securities are used, if one happens to be down, chances are great the others will be up. This minimizes your holdings risk.

A basic mutual fund can cover any number of different stocks and bonds. With just a small investment of time, you can gain access to many securities. A typical mutual fund can consist of anywhere from 25 to 5000 companies. The time and money savings is enormous. Very few people could research and manage their portfolio with that kind of spread and have any time left over. Another great thing about mutual funds lowering an investor's risk is the fund's manager or professional managing group.

"An investor in a mutual fund is automatically diversified over the many different securities held in that fund. Unlike holding one stock or other security, a fund investor holds shares of many different ones...thereby spreading risk. (One security may go down, another may go up in value) Investors can also diversify further by holding more than one type of fund, representing their goals: stock fund for growth, bond fund for income, balanced fund or money market fund, as examples," said Michelle Smith.

The persons who manage mutual funds are usually experienced and have the resources to study market trends and react accordingly with the mutual fund's assets. Being a shareholder gives you access to this level of knowledge that might otherwise be out of reach. A great fund manager lowers the risk for the investors. Some persons say to not trust a fund manager who has not been at a particular mutual fund for very long, but this is not true. A good manager is a good manager. You can research his or her history and see how funds have performed under them.

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