Protected Funds: Are They Right for Your Investment Goals?

Many people choose to invest in the protected fund because of its relative safety. With this type of investment, you will be guaranteed your initial investment by an insurance policy. However, this investment is not for everyone. Here are a few reasons the protected fund might not be for you.

1. Low Returns

When you invest in a protected fund, you will not be able to get substantial returns. These funds tend to provide some of the lowest returns on investment available. When you invest in this type of fund, you are basically trading security for lower returns. Since the main objective in investing is to make money, this type of investment does not always make sense. Fund managers for protected funds do not get involved in the stock market much. They will typically take on much safer investments which will provide lower returns. You could potentially bring in much better returns with another mutual fund that has only slightly higher risk. However, you will not be able to get a guarantee that you will be able to get your initial investment back.

2. Expense Ratios

When you get involved with a mutual fund, you will immediately become familiar with its expense ratios. Expense ratios represent the amount of money that you have to pay every year for the management of the fund. The money that you pay for expense ratios will come directly out of potential returns. Therefore, you want to get involved with funds that have low expense ratios as a rule. With the protected fund, you will typically find some of the highest expense ratios around. Therefore, you will be dealing with lower than average returns and higher than average expenses. Most of the time, this is not a winning combination for an investor.

3. Selling Restrictions

This type of mutual fund also carries some selling restrictions. In order to get your initial investment back, you must wait until after the guarantee period is up. Each protected fund will have a minimum amount of time that you have to stay invested in the fund. If you sell before the guarantee period is over, there is a good chance that you will not be able to get your initial investment back. In this case, you would only be able to get the current market value of the fund. This restriction can tie the hands of many investors. This makes it similar to investing in a CD.

4. Alternatives

Many investors that are in the market for a safe form of investment prefer other alternatives to the protected fund. For example, you could choose to put your money into a money market fund instead. Money market funds are typically very safe, and they allow you to move funds in and out of them very easily. Other investors prefer to put their money into a CD, as it is guaranteed by the FDIC and does not have the high expenses of a protected fund.