When you sit down to evaluate your portfolio, do you have trouble remembering exactly why you bought certain funds in the first place?
Do you buy funds randomly, based on a magazine or newspaper article?
If you answered yes to either of these questions, you may be guilty of fund collecting.
Mutual funds are pools of securities, which typically offer diversification within one or more asset classes. In general, people invest in mutual funds in order to achieve diversification in their portfolio without the trouble of managing a large number of stocks and bonds. Mutual funds are subject to market risk including loss of principal.
With thousands of mutual funds available today, some people have started collecting mutual funds. The downside: potentially lower returns on your portfolio.
Use a mix of stocks, bonds, and money markets to try to generate moderate growth and income while carrying moderate risk.
Invest in government, Treasury, and municipal bonds to provide revenue and help reduce market risk. Interest Rate Risk applies to fixed income securities like bonds. Fixed income securities will decline in value because of changes in interest rates. When interest rates rise, the value of a portfolio's debt securities generally declines. When interest rates decline, the value of a portfolio's debt securities generally rises.
Invest in foreign securities seeking to balance out single market performance risk. May include a percentage of domestic holdings. Investments in foreign securities, including depository receipts, involve risk not associated with investing in U.S. securities. Foreign markets, particularly emerging markets, may be less liquid, more volatile and subject to less government supervision than domestic markets.
Actively buy and sell stocks in an attempt to generate high potential returns. May use high-yield bonds or mortgage derivatives, which are subject to a greater risk of loss, including default risk, which results in greater share price volatility. Carry higher market risk than other fund types. Investing in growth stocks is based upon a portfolio manager's subjective assessment of fundamentals companies he or she believes offer the potential for price appreciation. This style of investing involves risks and investors can lose money.
Strive to post returns comparable to those of a benchmark index for investment category. Risk varies with asset class. Keep in mind that investors cannot directly invest in an index. Index mutual funds are not actively managed, and the advisor does not attempt to manage volatility or take defensive positions in declining markets. This passive management strategy may subject the investment to greater losses during general market declines than actively managed investments.
Seek to maintain a stable share price and generate income. Carry a relatively low market risk, but their lower returns are susceptible to inflation risk. You could lose money by investing in a money market fund. Because the share price of the fund will fluctuate, when you sell your shares they may be worth more or less than what you originally paid for them. The fund may impose a fee upon sale of your shares or may temporarily suspend your ability to sell shares if the Fund's liquidity falls below required minimums because of market conditions or other factors. An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The fund's sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time.
Buy and sell stocks of smaller companies in search of high return potential. Many of these funds are aggressive growth funds and carry higher risk. Investments in small/mid cap companies may involve greater risks than investments in larger, more established issuers because they generally are more vulnerable than larger companies to adverse business or economic developments. Such companies generally have narrower product lines, more limited financial resources and more limited markets for their stock as compared with larger companies.
These growth funds buy and sell stocks of larger, well-established companies in search of high return potential and a relatively lower degree of volatility. Investments in large-cap companies may involve the risk that larger more established companies may be unable to respond quickly to new competitive challenges such as changes in technology and consumer tastes.
Seek to maintain principal and generate modest income by investing in out-of-favor or undervalued securities. Low annual return potential may not outpace inflation.
The number of funds that is right for you depends on your investment goals, risk tolerance, and the amount of your investment capital. If you have both short- and long-term goals, you will likely want different types of mutual funds for each time frame. The more capital you have to invest, the greater your ability to afford diversification among different asset classes and investment styles.
Asset allocation refers to how you weigh the investments in your portfolio. There are three main asset classes: stocks, bonds, and money markets. Each has its own characteristics in terms of value fluctuation, level of market risk, and ability to outpace inflation. Which asset classes you decide to invest in depends on how your investment time frame and goals match up with the risks and return potential of the various asset classes.
The concept of diversification -- the process of investing in different types of funds or securities in order to reduce risk -- is an important part of asset allocation. Diversifying among different asset classes increases the chance that as one investment is falling in value, another may be rising. A mix of assets may help position your portfolio to benefit during market upswings, while suffering less during downturns.
If you have sufficient capital, you can also diversify among investment styles to further help reduce risk.
Active and passive investing are the two most basic investment styles. While active investing relies on the ability of managed funds to outperform the market, passive investing relies on the long-term success of market indexes.
Active investing is further divided into the two categories of growth and value. Growth funds typically invest in well-established companies with high earnings potential. On the other hand, value funds invest in companies that have recently fallen out of favor but are expected to bounce back. Many investors prefer to combine investment styles in order to potentially gain through the different market cycles that favor different approaches.
How many funds you need and how much you invest in each fund will depend on your investment goals, risk tolerance, and time horizon.
Generally speaking, if you have more to invest, you might want to consider adding a wider variety of stock and bond funds to your portfolio. However, with so many funds in the market, it is inevitable that there are several funds with similar strategies and performance. These funds invest in similar stocks and follow analogous investment styles.
If you hold several funds that all use similar investment strategies in your portfolio, you essentially hold the market. You could achieve the same result much more cost-effectively by simply buying an index fund.
Each fund that you invest in should play a specific, defined role in your portfolio. A financial professional can help you evaluate each fund and its role in your portfolio.
© 2016 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.
Please always consider the charges, risk, expenses, and investment objectives carefully before purchasing mutual funds. For a prospectus containing this and other information, please contact a financial professional. Read it carefully before you invest or send money.This article is provided for your informational purposes only.
Please be advised that this material is not intended as legal or tax advice. Accordingly, any tax information provided in this material is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or marketing of the transactions(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent advisor.
AXA Equitable Life Insurance Company (NY, NY) issues life insurance and annuity products. Securities offered through AXA Advisors, LLC, member FINRA, SIPC. AXA Equitable and AXA Advisors are affiliated and does not provide legal or tax advice. does not provide legal or tax advice.
GE 115068 (09/2016)