How do mutual funds work 13

Mutual Funds Part 1: How Funds Work and What Strategies There Are

The same applies to fund investments: Anyone who dares to venture onto the trading floor sometimes risks losses in the ups and downs of price movements. Compared to the direct purchase of individual stocks, investment funds offer a certain risk buffer due to their broad diversification. Nevertheless, fluctuations in value are to be expected. How strong these can be depends primarily on which specific investment products are in the fund's assets:

  • Equity funds are suitable for long-term oriented investors who can endure a longer period of losses and want to benefit from the long-term return opportunities of the equity markets.
  • Pension funds put their investors' money in fixed-income corporate or government bonds. Here the fluctuations are usually much more moderate than on the stock market, but with limited profit opportunities.
  • Mixed funds rely on both stocks and bonds and move between these two capital market segments in terms of risk.
  • Open-ended real estate funds invest most of their capital in long-term rented commercial real estate. With rather low fluctuations in value, they offer moderate potential returns.

In addition, it depends on which criteria the fund management uses when selecting securities. For example, exotic emerging market equity funds are associated with higher risks than those that diversify their capital across the global stock exchanges of industrialized countries. Mixed funds are also available in very different risk categories, depending on the ratio of stocks to bonds.

Tip: Before you decide on a specific investment fund, you should think about the investment risk you can and want to take. Do I have the nerve to endure phases of loss? Can I do without the money long enough to stay invested in the market even if the stock market is down? These questions decide which risk class you should consider when investing in a fund.

In the second part you can read about the advantages of investing in funds and how you can minimize additional costs.

Important: When investing in securities, you should always note that the return is not guaranteed and can fluctuate more or less strongly depending on the type of security. In serious cases, a total loss can also be possible. Then there is the liquidity risk. Here, the investor bears the risk that securities can only be sold undervalued due to a lack of market liquidity.