These days, mutual funds are among your safer investment options. Diversification, professional management, and the fraud-prevention exercised by the Security Exchange Commission and other regulatory bodies all help ensure that mutual funds stay relatively safe. Nonetheless, investing in mutual funds carries various kinds of risk that can impact your financial planning.
One risk that’s inherent in the nature of mutual funds is the fact that you, the investor, have no control over what’s being purchased for the portfolio. You are putting your money —and your investment fate — in the hands of the fund manager, which is why you need to study the track record of the fund company and the individual manager before you invest. Making sure that you’re giving your money to a reliable partner is important to your pocketbook and your peace of mind.
Another unpredictable challenge may arise when a fund’s “star” manager retires or changes jobs, leaving the fund without his expertise or brilliance. For example, Peter Lynch was one of the most successful and famous mutual fund managers in the world for many years. Under his guidance, the Fidelity Magellan Fund grew into the largest mutual fund anywhere, with over $72 billion in assets. Millions of investors poured money into Magellan, attracted largely by Lynch’s reputation and prestige. Since Lynch’s retirement in 1990, however, Magellan has performed with far less success, despite the strong performance of the stock market overall. If you’re a fund investor, follow the financial news. Be aware when changes in the management of your funds occur. You may want to consider switching funds when the manager responsible for your fund’s track record departs the scene.
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