Can Mutual Funds Rally against Bear Markets?

In a bear market, mutual funds may be a relatively safe investment, but this is only in comparison to the rest of the market. They will rarely outperform the market as a whole. The reason for this relative stability with a fund is simple: mutual funds are designed to be diversified portfolios that spread risk and therefore spread reward. When the market is up, your fund should be up. When the market is down, your fund may be down. If you are looking to beat a bear market, try specific types of funds.

Absolute Return Funds

If your goal is to get aggressive and actually make money in a bear market instead of just riding out the downtime, an absolute return fund may be the answer you have been looking for. This type of fund is focused on exactly what it says: absolute rather than relative returns. Even if the market is down, this mutual fund will not simply try to outpace the market, it will still aim for high returns.

Absolute return funds are risky because they engage in less secure trading options. However, these options can often succeed in depressed markets. For example, short selling is a popular strategy of absolute return markets and of investors in a bear market. Instead of betting on which stocks and bonds will be profitable, the fund will try to guess which will lose value. Absolute return funds also use derivatives, leveraging and other controversial tactics to meet their goals despite market conditions.

Bond Mutual Funds

If you want to play it safe in a bear market, you may simply be concerned with preserving your funds instead of making an income. In this case, a bond mutual fund may be a good idea. Bonds are generally safer than other investments because they cannot fall below a certain value, the principal investment plus interest, unless the issuer goes bankrupt.

The safest bonds are government or municipal bonds. The only real risk with these options is inflation, which can be countered through inflation protected purchases. Of course, you will not make a lot of money off of these options. They are wealth preservation and management choices, but they will not significantly grow your bottom line.

Real Estate Investment Funds

Some investors believe real estate is another secure investment. On the whole, real estate values will grow over time. However, in recent years, there have been a number of examples of where this is not true. Certain commercial markets have fallen far below their anticipated revenues, and other residential markets have experienced the popping of a large bubble, leaving many in foreclosure situations.

If you are going to invest in a real estate investment fund in a bear market, the investment should be long term. It typically takes real estate longer to recover than other sectors of the economy. The good news is, at the end of the day, you do have an asset backing your mutual fund. There is a ceiling to how low the price of a home can go based on the many parts that make up the home.

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