Mutual Fund Downside Protection

Calgary Select: Mutual Fund Downside Protection


Protect your RRSP in all market conditions

(NC)-Looking for the best mutual fund option for your RRSP this season? Many experts agree that you should examine a fund's performance in good times and bad before investing.

When researching where to invest your money, it is important to balance the need for upside potential (high returns) with downside protection (against capital loss). Unfortunately, many people focus solely on growth and gains, without regard to how a fund may perform in poor market conditions. This could expose your principal to unnecessary risk.

"It's important to understand that there are two sides to every investment - the way it performs in strong economic conditions, and the way it performs in weak conditions," says Allan Smith, president and chief executive officer of Saxon Mutual Funds. "The best fund managers are those who perform well in good times, and limit your risk in bad times. "

While the Canadian market is experiencing a period of strong economic growth, it is important to understand that markets are cyclical - and if you are investing for the long term, you will experience ups and downs in your investments. According to the Government of Canada, the length of a business cycle ranges anywhere from six to ten years. So the money invested in your RRSP will need to withstand many cycles by the time you retire.

Consider investment style

When considering downside protection in your portfolio, it is important to understand the difference between growth and value investing.

The objective of growth investing is for fund managers to find companies with growth rates much higher than the market average. Growth stocks are priced higher than average because of anticipated future earnings, and can be risky. If the projected growth rate proves to be wrong, investors can experience significant losses.

On the flip side, value managers select under-priced companies that are out of favour by the market, but have the potential for turnaround. This approach offers investors downside protection (because the price is already low), and significant upside potential if the company turns around its fortunes.

Investigate long-term performance

Research shows that people are more sensitive to losses than to gains of the same magnitude. Look at long-term performance numbers to see how a fund performs in a poor market. Consider three, five and ten year indicators.

Also, take a look at how the fund has performed in good, flat and poor markets by reviewing its performance against the market benchmark.

In good economic conditions, there are a large variety of high performing investments to choose from. Funds that provide downside protection will limit the potential loss in your investments that could result from a decline in the economy or market.

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