Whether mutual fund investments are safe depends on the underlying securities a specific fund invests in.
For instance, a fund that invests in risk-free Treasury bills such as those issued by the U.S. or Canadian government, is considered to be safe because both these governments guarantee such investments, and it is unlikely that either would default on their debt obligations.
On the other hand, a fund that invests in government bonds does not guarantee that you won’t lose a portion of your initial investment. That is because there is an inverse relationship between bond prices and interest rates. In a rising interest rate environment, bond prices fall and vice versa, when interest rates fall, bond prices rise.
A mutual fund that invests in stocks has a greater risk profile compared to a bond fund; that is because stock prices fluctuate more depending on market forces. Therefore, you can lose a portion of your capital when the overall market, or a specific segment of the market declines.
What is important to note, is that fund managers take great care in selecting securities and try to build diversified portfolios, often as a measure to minimize the risk to investors. Typically, the various securities in a portfolio move in different directions, with some going up in value and some falling in value, and this reduces the chances of the fund losing money.
To learn more about investing in mutual funds contact your financial advisor today.