It is believed that Mutual Funds is one of the safest ways to invest. Last week a mutual fund [which invested in companies that were close to defaulting on their loans and those that already had] imploded and blocked investors from their money. Apparently it's not the first high yield bond fund to lose money this year. This had me wondering if investors can lose their money how safe an investment are mutual funds?
From my standpoint as a layman in terms of investments, anything that involves money has the risk. That's why the best investment for me is still the bank. However, banks offer very low interest on their basic products particularly the savings account and even time deposit but they also have other products like money market. With Mutual funds, it is a gamble to put in big money so my suggestion is not to put all your eggs in one basket. There are so many sad stories like that here when the company folded up.
The fact that you mentioned "high yield bond fund" says it all. In another era that fund would have been called a "junk bond" fund, which basically tells you that you're getting a good yield offered to you because of the poor quality of the paper. We're also seeing a lot of pressure in the junk bond sector, particularly after one fund stopped investors from withdrawing their money. When market liquidity tightness occurs that's what can happen.
Agreed. Not all mutual funds are the same, and many of them have restrictions on them that may or may not make them more or less risky. A mutual fund that is limited to investing in one or more riskier categories such as junk bonds, emerging markets, small cap companies, or commodities-related investments is going to generally be riskier than a fund that has little or no constraints... or that is limited to less risky areas of the market such as investment grade bonds and large cap blue chip stocks such as those found in the Dow 30 and perhaps the S&P 500. I also believe that you're generally likely to be better off investing in funds that are managed by fund managers with long, successful track records of performance through all kinds of market conditions.
I used to have some money invested in a mutual fund here in the UK which tracked some very, very low risk government backed bonds. But after I'd discovered and read Nassim Taleb's stuff, I realized that the low return wasn't really offset by the security of the investments. A Black Swan event in the Eurozone could easily affect any government holdings, so once I began trading on my own it seemed more sensible to liquidate those assets and use them as trading fodder in other ventures.
jpu13350 There are better choices than leaving money in the banks. They just invest it in the market. So why let the collect the extra interest on your money only to give you a paltry return. My investment advisor has done a solid job over the last 25 years. I have averaged almost 12% during that time. As with any investment the longer you can invest the better chance you can get a decent return.
Yeah, deposit accounts at banks are pretty much the worst place to get any ROI - particularly these days with rates so low. But many banks do offer full investment services. You'll need to invest the money (stocks, bonds, mutual funds, etc) to see any substantial return. But the more aggressive the money is invested, generally the higher the risk to principal. One thing to watch out for with banks is that the smaller local institutions are having a harder time surviving these days - no thanks to Dodd-Frank. While banks do carry FDIC insurance for deposit accounts, and up to $500k SPIC insurance for investments for each client, putting money into an institution that is not financially sound itself is something to try to avoid if possible.
Putting money in the bank is a good way of keeping it in tact for future use, but it's not the best place to put your money into if you want to invest. The problem in just putting your money in the bank is that you're actually on the losing end as time goes by. Imagine this, every time you deposit your money in the bank, you're actually lending them your money. You may think that you're putting it there for the purpose of safe keeping but the fact is that you lent them the money for them to invest in various companies (same way as how money in mutual and investment funds are invested) and when they gain from it they only give you a very small portion of the money they gained. They're the ones who's actually making the most out of your money. The interest that your money gains from the bank is but a small dot from the amount of money they have gained from it. Another given fact is that money put in the bank does not catch up with the inflation. As prices go up, the money that you're keeping in the bank decreases its value.
Great points! Our money is not just sitting in a room waiting for us to come and get it, the banks lend it out. And if I remember correctly, I read an article that said some, if not all, banks are allowed to actually lend more than they have. So really, it seems like a juggling act, and we take for granted that our money will always be there if, and when, we decide to go and withdraw it.
I'm starting the arduous process of acquiring financial literacy. As a slightly older dog - at 30 - it is quite a challenge. I'm thankful for threads such as this because hopefully, I'll learn something from you guys through osmosis, haha. I'm only starting to understand some of the things you're saying. If the mutual fund insists that it only invests on blue chip companies, am I right to think that it is a (relatively) safe bet?