Investing in mutual funds has long been a safe way to invest money. But recently there have been increasing concerns over the risk and volatility of investing in mutual funds. Concerns are mostly over the possibility of the manager of a mutual fund losing control of it, leading to disaster. But with today’s technology, increased access to information, and more reliable analysis tools, it is possible to greatly reduce the risk of investing in mutual funds. Here are some ways you can invest in mutual funds more safely.
Investing in passive funds is perhaps the simplest way to invest in mutual funds. A passive fund is simply an open-ended professionally managed investment fund that pools money from multiple investors so that the average investor does not have to buy securities. Passive funds are usually “self-directed.” Many investors are able to benefit from the consistent flow of cash provided by these types of investments because they only need to buy when they need to.
Another type of investing in mutual funds offer flexibility. Most actively managed funds list all of their securities in a list that is available to the public. Investors looking for specific types of shares often use a broker to search for those shares. Brokers buy and sell shares on an exchange just like a stockbroker would. They may also help new investors get started. Because many brokers buy and sell shares as part of their daily business, they are often considered the “go to guy” when it comes to investing in the stock market.
Diversification of your portfolio is another way to reduce the potential impact of one person’s investment affecting your entire portfolio. Diversification is the reduction of the concentration of risk within any given portfolio. It is a gradual process that starts with a focus on building a portfolio that is focused on national, regional, and sometimes global investments. When you start with a diversified portfolio, you are reducing the size and amount of risk that could be concentrated in any one area of your portfolio.
Diversification also allows you to reduce your fees. Most managed funds have fees associated with the investment management process. Fees can vary widely from fund to fund and are based on the performance and value of the fund’s assets, management fees, minimum distributions, and other charges. Before investing in any managed fund, be sure to research all of the charges and fees associated with the fund. Compare the costs to the future results you hope to achieve by investing in the fund.
Investing in individual stocks is another common way of investing in mutual funds. Individual stocks can be bought in smaller amounts than the funds in a managed fund. This allows you to own a portion of a large company without putting all of your money at risk. Smaller stocks can provide the same amount of security as a well-diversified portfolio, but are not as likely to suffer as large losses.