Mutual Fund Risks
Though mutual funds offer diversification, they are not immune to market movements and changes in the economy. As with any investment, a mutual fund's value can suffer losses if the economy, market or a market sector experiences a downturn. However, owning a variety of types of mutual funds may help protect your overall portfolio from losses if certain sectors are up while others are down. Nevertheless, there are certain risks that are particular to mutual funds that can decrease your portfolio's diversification despite your best efforts.
Portfolio overlap occurs when funds with different objectives invest in the same company. Sometimes a fund will buy stock in a corporation even if it lies outside its main focus, if it believes the investment will help maximize overall returns. Even if you're invested in a variety of mutual funds with diverse objectives, there's a chance that many will still hold the same security, leaving your portfolio more reliant on the performance of one investment than you realize.
In addition, though mutual funds invest in and out of individual securities on a regular basis, they publish a list of their holdings only on a quarterly basis. This lack of transparency adds to the potential that your portfolio could be experiencing portfolio overlap without your knowledge. Or, it might mean that you're unknowingly invested in a company in which you might prefer not to invest.
Diversification does not assure a profit, or protect against loss, in a down market.
Investors should consider the investment objectives, risks, charges, and expenses of a mutual fund carefully before investing. A prospectus contains this and other information. A mutual fund prospectus is available through www.scottrade.com or through a Scottrade branch office. The prospectus should be read carefully before investing.