Are Mutual Fund Investors Chasing Profits or Security?

Mutual fund investors are often looking to streamline their investment decisions by investing in a pool instead of creating their own portfolio. The best mutual funds offer investors the best of both worlds: consistent profits and relative security. While they do not tend to be the highest performing portfolios on the market, there are certain mutual funds that engage in riskier investing than others, increasing the chance for big gains. A given investor may be interested in profit, security or both.

Profitable Mutual Funds

Mutual funds looking for the biggest gains are often top choices of more sophisticated investors or those with a higher appetite for risk. For example, some funds specialize in international currency investing or commodity investing, which tends to be more complicated and volatile than standard domestic stock and bond investing. The riskiest of mutual funds are absolute return funds. These funds are seeking to gain the largest profits possible by any means necessary. They engage in short selling, derivatives, leveraging, futures and options trading. These strategies are more often applied by hedge funds than by mutual funds. A mutual fund engaging in this riskier behavior will still be subject to the investment regulations applied to all mutual funds by the U.S. Securities and Exchange Commission. Hedge funds fall into a separate category that can absolve them of some responsibility to this regulation. Mutual funds trading on absolute return are still considered safer than hedge funds even though they are not the most secure type of investment available.

Secure Mutual Funds

Investors looking for more security in mutual funds have a number of options that will help them profit without too much risk. Some mutual funds invest strictly in bonds, which tend to be lower risk than other investments. An investor will know the style of a fund from the beginning. This style should stay consistent over time, barring any drastic style drift, to keep the security of the investments high even if profits are relatively low. An investor looking for the most secure option should consider a fund with low volatility, meaning it has consistent returns each year, even if those returns are small. The investor can even use a benchmark, such as a low risk Treasury bond portfolio, to compare the security of a mutual fund to another safe investment.

Balancing Profit and Security in a Mutual Fund

Mutual fund profitability and security are often compared using the efficient frontier. This frontier is a curve, similar to a supply and demand curve, that provides insight into how much more risk an investor must take on in order to see a gain in profits. A fund trading on the curve offers profits consistent with its risk. Along the curve, there are any number of mutual funds that offer low risk and fair rewards relative to this risk. An investor has a choice of where along this curve she would like to lie, either with low risk and low reward or high risk and high reward. When a fund is consistently balancing these two factors, it is a secure fund.

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