Mutual funds traditionally get high marks for being a “low-risk” investment. But if you think about them that way, you could be putting your money at risk.
A Forbes article on mutual funds broke down the winners and losers during a recent market downturn. One fund – the Putnam Investments Growth and Income Fund – has underperformed its peers for the last nine years. Plus, over the last year, it has dropped 23 percent.
The cause? Most likely its large holdings in Bear Stearns, Countrywide Financial, Bank of America, and Citigroup while the financial sector collapsed. To make up for that, the fund then loaded up on ExxonMobil just before the recent decline in the energy sector.
The lesson any mutual fund investor can learn from this is to closely examine the largest holdings in a fund prior to investing in it. If the fund is too heavily weighted in a certain sector, you are left exposed should that sector run into problems. And once you buy into a fund, you should be constantly monitoring its allocation. The holdings can change at the fund manager’s discretion, and the balance can become drastically different over time.
The composition of most funds can be found online, so doing your initial homework and then checking up on the ones you buy is relatively easy. In the long run, you will be happy you took an active role in managing your risk exposure.[Ed. Note: While you’re researching the best mutual funds for your dollar, check out one of the greatest investment opportunities of the 21st century: the massive bull market in oil and gas. Now that doesn’t mean you should buy most oil and gas companies. In fact, you should AVOID them.]