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Mutual Funds Risk and Return

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An analysis of mutual fund risk and return is an important process when deciding whether to invest your hard-earned money during this economy. So understanding what constitutes mutual fund risk and return is the first step. Read on to see how to analyse mutual fund risk and return yourself.

First, you need to add up all the reasons it is a good idea to invest in mutual funds. This is where you are looking at the "return" of a mutual fund investment.

Return: Diversification

One benefit "return" of investing in mutual funds is that they provide diversification for an investor. Diversification provides an investor with the ability to invest in many different companies and investment types (like stocks and bonds) without having to have a lot of money to do so. Investing in just one company--or many companies separately can be more expensive than buying into one fund, which contains an investment presence in lots of companies.

Diversification of mutual funds, then, can also return financial rewards, since losses incurred in, say, one stock invested in would likely be offset by the gain experienced in a bond that same year. This is because if the stock market does poorly; the bond market usually does well and vice versa.

Return: Rate

Some people are attracted to mutual funds due to their potential for a higher rate of return than certificates of deposit and other investment options. Mutual funds might experience a lower rate in one part of the fund, as just explained, while offsetting that by an increased rate in another.

While some might argue that this is a benefit-not a financial return-it is actually both: mutual funds pay higher percentage rates, generally, than a certificate of deposit.

Return: Expertise Provided

Mutual funds are generally managed by experienced and competent financial managers who are familiar with investment tools and processes. This is one of the benefits of investing in them; individuals do not have to become stock savvy overnight to gain benefits in their investment.

But this is also a financial return too, since the learning curve on managing your own stocks has the potential to be costly for the beginning investor.

Risk: Diversification

Just as diversification can be considered a "return"; it can also be considered a "risk."

While some mutual funds are well diversified and include both stocks and bonds, and from different types of fields (agriculture, science, technology); there are some mutual funds that are less diversified (concentrated in one field: all agriculture or all science).

A lack of overall field diversity defeats an important reason why people invest in mutual funds: spreading their wealth in a number of fields to limit risk.

Risk: Rate of Return

Some mutual funds have management and transaction fee costs that eat up any rate of return that would have been gained by investing in them. In addition, mutual load funds can require an upfront cost that puts an investors investment "in the red" from the beginning.

Risk: No FDIC Insurance

Mutual funds are not federally insured like certificates of deposit. This lack of FDIC insurance is one of the drawbacks-or risks-that are inherent in investing in this type of investment tool.

Resource: Personal Knowledge/University Business Courses

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