Risk and Risk Management

Risk and risk management is key to mutual fund research. All investments carry a degree of risk. Risk is the chance that all or part of your money could be lost. Risk management is an important part of smart investing. Risk management is not only about preserving your investment money but also preserving the return on your investments.

What are the risk associated with investment?

The biggest risk all investors fear is the risk of losing money. Aggressive investors take more risk, hoping for high returns while conservative investors take little risk or no risk. Some mutual funds carry more risk than others. There are mutual funds that primarily invest in fixed income securities and thus are less risky as investments. Because some investors can handle more risk than others, risk management is very important when it comes to mutual fund research to determine the best mutual funds for an investor. Aggressive risk management is needed for conservative mutual fund investors who can take little or no risk in their investments.

When you invest conservatively, a major risk is the risk that the after tax return on your investments will not keep pace with inflation. 

Example of inflation and risk

For example, if you  have a 1-year CD that pays interest at 4%. If the rate of inflation is 4% and you are in 28% tax bracket, the actual return on your CD is -1%. That means if your CD is for $1,000. After a year it would only be worth $988. Although you keep earning interest by owning a CD, CDs are not risk free investments.

Risk Management is necessary

Since you cannot avoid risk in your investment, risk management is a necessary part of your investment strategies. You need a risk management technique that is suitable for your investment goal and portfolio.

Mutual fund research and risk management

When doing mutual fund research, you need to pay attention to the risk management factors. There are many types and styles of mutual funds and some are riskier than others. A risk analysis comes in handy. Risk management and risk analysis is easy nowadays with many risk management software readily available. Investors doing mutual fund research can just plug in the name or TICKER symbol of the mutual fund in question into the risk management software or risk analysis software and let the computer do the risk analysis.