Low Risk Mutual Funds

There are several mutual funds that, should the investor conduct research, can bring respectable rates of return without too much risk.

Exchange-Traded Mutual Funds

The exchange-traded fund is similarly structured to an open-end investment company.  They are traded on the stock exchange, and most are index funds and stock market indexes.  Exchange-traded funds are more efficient than traditional mutual funds and thus have fewer expenses.  Exchange-traded funds provide low expense ratios and tax efficiency of index funds.

Exchange-traded funds have numerous advantages.  First, they generally have lower costs because they are not actively managed and are insulated from the costs associated with buying and selling securities.  Next, these funds can be bought at current market prices at any time during the day, unlike traditional mutual funds that can only be traded at the day’s end.  Third, exchange-traded funds generate low capital gains, thus there is enhanced tax efficiency.  Fourth, these funds provide diversification across entire indexes.  Finally, exchange-traded funds have transparent portfolios that are frequently priced during the trading day.
There are various kinds of exchange-traded funds.  Index funds hold securities and try to copy the performance of a stock market index.  Commodity exchange-traded funds include commodities such as metals and fixtures and they are generally index fund that do not invest in securities.  Exchange traded commodities are asset-backed bonds that track the performances of underlying commodity indexes.  Bond exchange traded funds invest in U.S. Government bonds and do well during recessions as investors put their money into U.S. Treasuries.  There are numerous other kind of exchange-traded funds: currency exchange-traded funds, actively-managed funds, hedge fund exchange-traded funds, exchange-traded grantor trusts.  Shareholders should research these before making an investment.

Hedge Funds

Hedge funds are speculative funds that make large bets on market movements. These funds are open to certain investors who are permitted by regulators to undertake a wider range of investment.  Unlike mutual funds, hedge funds have loose SEC regulations, though some managers are forced to register with the SEC as investment advisers.
There are well over 8000 hedge funds, which partake in a $1 trillion industry.  Most hedge funds are highly specialized, and many successful managers limit the amount of capital they will accept due to the fact that many strategies are limited to how much capital the managers can employ before the returns diminish.  Most hedge fund strategies seek to reduce market risk through derivatives or shorting equities.  Because the potential for substantial profit is so great, more and more pension funds and endowments allocate assets to hedge funds.  Additionally, private banks tend to favor these kinds of investments, as they, in particular the old ones, understand the consequence of major stock market corrections.

In part due to the recession of 2009, there is a present misconception that all hedge funds are volatile.  Some believe that all hedge funds use global macro strategies and place large directional bets on bonds, gold, and other commodities, while using lots of leverage.  In fact, only 4%-5% of all hedge funds are global macro funds and most use derivates only for hedging, if at all, without using any leverage.

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