Mutual funds are great investments because they expose you to more assets while also diversifying your holdings.
Bonds are one among the favorites for investors because of their ability to provide income and their lower vulnerability to risks and volatility. They also offer some amount of return on capital.
If you want to protect your funds in times of economic downturn, government-issued bonds would be a better bet than corporate bonds. That’s because even in the most drastic of times, the US is very unlikely to default and leave its obligations, much less declare bankruptcy.
In a similar manner, bond funds from highly stable and established foreign governments will help you minimize the impact of an economic downturn.
Foreign corporate exposure might be of huge help as well, but choose those that are highly rated. As implied, even if an economic downturn in the US economy affects other countries, foreign corporations that are stable and well-governed will probably take fewer damages. There are even instances where foreign stocks actually gain in value.
Say No to Leveraged Funds
There’s a good reason why mutual funds aren’t free to use any amount of leverage. And the reason is obvious: if you’re lucky, leverage can inflate your returns. That’s good. But if lady luck isn’t on your side, you’ll probably lose more than what you’ve had. That’s not good.
The mutual fund can only borrow 33 percent of its total portfolio value. Even if this is already relatively lower than other kinds of funds (like hedge funds), it still multiplies the chances of a disaster, making the fund insolvent during a market downturn.
Money Market Funds
Money market funds are funds that invest in short-term debts from the US government or highly rated businesses. That means the risk of default is ultra-low and that makes these funds among the safest kinds of funds out there.
Noncyclical Stock Funds
You don’t have to completely steer away from stocks during an economic downturn, even though it’s probably the riskiest financial market by then.
Stocks that remain relatively safe during market negativity, which are called noncyclical stocks, exist. These are stocks from companies that offer goods and services that are necessary even when the economy goes south.
For example: the utilities sector. It takes less damage during downturns because electricity, gas, and water are necessary stuff that people will buy even in—especially during—crises.
Alternative Funds for Diversification
Alternative funds also exist. These funds use investing strategy normally used by hedge funds, like arbitrage. Even though some strategies are not really made for safeguarding the portfolio, these funds can help minimize risks by taking long and short positions in stocks and derivatives.
Mutual funds are popular because of the almost-instantaneous diversification that they provide. On the other hand, to protect your fund investments from the next financial crisis, diversify further by investing in different types of funds so you can further spread your risk around.