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Can Investors Lose Money In A Mutual Fund?

Can Investors Lose Money In A Mutual Fund?

As with any investment mutual funds are just as prone to losses as stocks, bonds and real estate. What makes mutual funds a wise investment for most individuals is the diversification that mutual funds provide which helps lower overall risk for principle loss.

Mutual funds tend to invest in any number of different types of pooled financial instruments. There are stock mutual funds, bond mutual funds, real estate investment trusts or REITs, and mutual funds that invest in various sectors and in money market instruments. The mutual fund is just a reflection of the collection of financial Instruments it has purchased. As such, as an investor it is wise to invest in mutual funds which reflect ones overall investment goals and level of risk aversion.

Investing in a growth and income mutual fund will essentially be investing in growth and income stocks or investing in the technology mutual fund will be investing in multiple technology stocks. The primary benefit of investing in these types of mutual funds is that dedicated portfolio managers with years of experience make the selections of which stocks to buy, hopefully picking winners, so the investor doesn't have to spend the time researching various companies and determining if their stock is a good purchase.

Diversification is a primary benefit of mutual fund investment but that does not mean mutual fund investing is without risk. If a mutual fund manager is investing in lots of high tech fast growing stocks which are inherently risky then the mutual fund may experience more dramatic shifts in per share price which may make investors uncomfortable. However, by law, mutual funds are legally required to provide potential investors a prospectus which outlines the goals of the mutual fund, various management fees in the inherent risk that the portfolio may experience.

Another nice aspect of mutual funds is the ability to incrementally purchase shares for a fixed dollar amount over an extended period of time. This is referred to as dollar cost averaging and in combination with diversification can significantly reduce and investor's risk of losing money in a mutual fund. There is no such thing as a zero risk investment but these two specific characteristics of mutual funds go a long way to preserving investment principle.

Just like any other investment examine where you are in life, your age, investment goals and pick a mutual fund which reflects your investment style accordingly. Investing is a long-term opportunity to increase financial security and achieve your long term financial goals. Any investment can lose money but smart investing and diligent research can help minimize any potential losses. Mutual funds may not be for every one but they are a viable and efficient investment tool which should be a part of every investor's portfolio.

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