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The Importance of Risk Management in Mutual Fund Investing

The Importance of Risk Management in Mutual Fund Investing

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Published by: daniel-viklund-2991 on Dec 11, 2009
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11/15/2012

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The Importance of Risk Management in Mutual Fund Investing
Every penny invested in the stock market represents a risk of losing said penny. It is this potentialfinancial
downturn
that makes any investment unstable. There are no such things as “safeinvestments” or “guaranteed returns”, only variable amounts of risk and proportional yields.The, although temporary, solution to the risk problem in investing is the principle of diversification,whereas one spreads the investment over several securities (and many times over different types of investment vehicles!) to reduce losses over a whole portfolio.Fluctuations in a perfectly diversified portfolio tend to be less those of targeted (i.e largeallocations in few securities, like stocks) and generally generate a more stable return on investment(ROI).This is the basic premise behind many investors’ point of action towards the market - they try todiversify their investment. Thus,
 funds
should look like an healthy alternative.A fund is a great option to the more or less passive actor on the market: it gives an easy investmentopportunity with little hassle. Best of all, it’s already diversified! Beware! This where the risk startsto increase.Even though the fund is diversified, your overall portfolio might, counter-intuitively, not be! Thefund, usually, represents a specific market and is thus prone to the market instability. Sectors
can
gounder just as likely as any stock might drop to a bottom notation.That is why I recommend diversifying your fund investments. Aim for funds in different markets,including money market funds, and in different countries. Thus you will not only spread your risksover multiple securities, but also countries, sectors, indexes and all their underlying equities.
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