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Investment funds based on stocks, bonds, or both, have a certain degree of risk, which means that you can lose your money in any fund depending on what is happening in the market and how the investment funds respond to such events Funds that have only shares are more risky than those that combine stocks and bonds, but even among stock funds there are some riskier than others due to the specific nature of the documents.
Funds that invest in specific sectors, such as energy, health or real estate, and those that focus on actions of very small companies, are riskier than funds that focus on actions of large and well-known companies in various industries. In addition, some global equity funds have more risk than others, especially those dealing with emerging markets or countries in particular. In general, the smaller and more focused the niche, the riskier the investment fund will be.
Why invest in high-risk funds?
Although the average investor can diversify by buying cross-sections of long-term funds (and stocks and bonds of small companies), more aggressive investors choose high-risk funds because at greater risk there is the potential for a reward. During periods of high growth, having a high-risk investment can pay fast dividends. High-risk funds offer exposure to areas that otherwise could only be achieved through individual purchases of shares, which can be even riskier.
The sectors, such as energy, health and real estate, focus only on the actions of companies that conduct business in that sector. For example, an energy sector fund will only buy shares of related companies in the extraction and distribution of coal, natural gas and oil. Meanwhile, a health sector fund will focus solely on the actions of companies that provide medical supplies, pharmaceuticals and health services. Sector funds may experience growth that yields good returns for investors, but during bad periods, they can lose money faster than well-diversified funds.
Among international equity funds, those that focus on small and non-US companies, or emerging markets or countries, such as Brazil, China or India, carry more risk than international funds that focus on large companies or developed regions, such as Europe. Small countries and less developed economies are subject to greater volatility and are less likely to remain stable in an economic crisis, but when those regions and economies are growing, investments generate dividends typically above average.
Another type of high-risk investment funds, small-capitalization funds, have shares of companies valued at less than US $ 300 million. Small company investment funds are generally riskier than larger company equity funds, but they are really risky, especially in volatile markets.
High-risk investment funds are actively managed. This means that managers follow strategies based on market or sector research, and frequently buy and sell the shares to stay on the line of the strategy. Frequent transactions in an investment fund result in higher rates and expenses than those of a regular investment fund.