8 Fund Types to Choose in A Recession
In the world of investments, when there’s a recession, fears of declines and increasing losses influence investors to get out of stocks and move to less risky investments such as bonds. Whether you are an experienced investor like Tomas Vargas Harvard or new to financial markets, everyone should explore investment options for difficult market conditions.
1. Federal Government Bond Funds
Several types of bond funds are the first preference of risk-averse investors. U.S. Treasury bonds are considered to be one of the safest options. They are considered to have no credit risk, the risk of a credit event such as a default, and are backed by the U.S. government’s ability to levy taxes, which helps eliminates the risk of default and provides major protection.
2. Municipal Bond Funds
Municipal bond funds, which include bonds issued by state and local governments, are also considered very safe. They are riskier than federal government securities, but still very safe due to local taxing authority, which reduces credit risk.
3. Taxable Corporate Bond Funds
Taxable bond funds include bonds issued by corporations. They offer higher returns than government-backed bonds due to their higher credit risk. Selecting a fund that invests in high-quality corporate bonds issued by the most stable companies can help reduce risk. While corporate bond funds are riskier than government bonds, they are typically less risky than stock funds.
4. Money Market Funds
Extremely risk-averse investors can invest in money market funds. These funds offer a high degree of safety by purchasing very short-dated bonds. Investors can choose different levels of credit risk and liquidity among money market funds.
5. Dividend Funds
According to some investment professionals, investors don’t necessarily need to completely eliminate stocks from their portfolios during recessions. While investors make money when stock prices increase, they can also earn an income return from stocks that pay dividends. Mutual funds focused on dividend-paying stocks offer strong returns with less volatility compared to funds that focus on growth only.
6. Utilities-Based Mutual Funds
Utilities-based mutual funds include stocks from utility companies, which are frequently regulated and have more predictable revenues. These funds can be less risky than general stock funds and often include more stable dividends.
7. Large-Cap Funds
Funds investing in large-cap stocks, stock from the largest companies, usually tend to be less risky than small-cap stock funds because established profitable companies usually are better equipped to survive tough times. Investing in stock from the most successful companies instead of developing companies with less certainty of business success offers a way to protect your portfolio against market declines without leaving the stock market.
8. Hedge Funds
Investing a portion of your portfolio in hedge funds is a great option for qualified investors. Hedge funds aim to make money in all market conditions and frequently use sophisticated investment strategies including shorting stock or purchasing options, which can reduce risk and offset losses in a declining stock market. Some hedge funds are specially designed to be most profitable during stock market volatility or recessions.
Final Words
Recessions can be very difficult for investors, but be aware of your options. Tomas Vargas Harvard advice every investor to think strategically and choose investment options that will allow you to survive tough times and continue to grow your portfolio in the long term.
Originally published at tomasvargasharvard.wordpress.com on August 21, 2018.
