Mutual Fund Investment Risks - Nationwide (2024)

FAQs

What is the downside risk of a mutual fund? ›

What Is Downside Risk? Downside risk is an estimation of a security's potential loss in value if market conditions precipitate a decline in that security's price. Depending on the measure used, downside risk explains a worst-case scenario for an investment and indicates how much the investor stands to lose.

Mutual funds provide convenient diversification and professional management through a single investment, but can have high fees, tax inefficiency, and market risk like the underlying securities.

Are mutual fund investments safe? Market-linked mutual funds are subject to market risk that can be caused by several reasons such as changes in policy, macroeconomic conditions, pandemics, poor investor confidence and so on. Therefore it is a good idea to go through document papers carefully before investing.

High-risk mutual funds are those that invest in stocks or equity that have a higher risk of losing value. These funds are also known as equity funds or growth funds. They are designed for investors who are willing to take on more risk in exchange for the potential of higher returns.

One of the prominent reasons for mutual fund loss is a need for more knowledge about the investment options and market. Individuals who invest in mutual funds without proper research often end up in a situation where they have to face a loss of money.

Lack of Control. Because mutual funds do all the picking and investing work, they may be inappropriate for investors who want to have complete control over their portfolios and be able to rebalance their holdings on a regular basis.

The chances of your mutual fund investment value going to zero are practically almost impossible as it would mean that all the assets in the fund's portfolio will have to lose their entire value. However, the returns from a fund can go to zero or even become negative.

Mutual funds diversify investments, reducing risk, but also limit potential gains. Mutual funds are managed by professionals, reducing the need for monitoring, but investors give up control. Stocks offer higher returns but come with higher risk and volatility.

The underlying securities of mutual funds comprise stocks from different companies. Due to this, mutual funds offer you the benefit of diversification. However, during a market crash, stock prices come down. This, in turn, pulls down the performance of mutual funds holding these stocks.

What is the safest type of mutual fund? ›

Money market mutual funds = lowest returns, lowest risk

They are considered one of the safest investments you can make. Money market funds are used by investors who want to protect their retirement savings but still earn some interest — often between 1% and 3% a year. (Learn more about money market funds.)

1. They don't offer stable returns. The primary reason why mutual funds are considered to be risky deals is due to the fact that the returns they offer are not stable or guaranteed. Since the performance of the fund is linked to the movement of the market, mutual funds only offer returns if the market performs well.

One of the most compelling reasons to start investing in mutual funds early is the power of compounding. Compounding refers to earning returns not just on your initial investment but also on the returns generated over time.

The riskiest investments are often speculative in nature. While there are investment opportunities in each asset class that could result in you losing some or all of your money, cryptocurrency is often considered to be among the riskiest types of investments.

Disadvantages include high fees, tax inefficiency, poor trade execution, and the potential for management abuses.

Potential for loss: Mutual funds are not FDIC insured and may lose principal and fluctuate in value. Cost: A mutual fund may incur sales charges either up-front or on the back end that are passed on to the investors. In addition, some mutual funds can have high management fees.

All investments carry some risk, but mutual funds are typically considered a safer investment than purchasing individual stocks. Since they hold many company stocks within one investment, they offer more diversification than owning one or two individual stocks.

The ratings range from 1 to 5 (1 being the worst and 5 being the best) and are based on the differences in the monthly returns of a fund, in comparison to its peers. To help investors and enable them to identify potential portfolio additions, Morningstar assesses risk across five different levels to produce the rating.