If you’re planning on investing big but are worried about the volatility of the market, then investing in a new kind of fund is the best idea. This kind of fund is slowly gaining popularity because it maximises the market upside while limiting the downside risk. Such funds are called long/short funds.
In a long
short fund, the fund manager may hold funds that are undervalued currently but
believes will rise in price in the long run while simultaneously shorting over stocks
that are overvalued so as to mitigate losses. These funds offer investors and
people new to the market various opportunities to take advantage of the
long/short strategy. And just like other mutual funds, these funds also offer
daily pricing and the ability to liquidate the investment at any given time.
Advantages
and Disadvantages of such funds
Advantage –
The main advantage is that you get a diverse portfolio. Your potential
investment sphere is enlarged because you look at both long and short funds for
the maximum performance. Secondly, if done correctly, there is the potential
for excess returns. These returns are gained from both rising and falling
prices.
Disadvantages
– These funds are considered riskier and should thereby be exercised with caution.
If your profile is low risk, you should stay away from such funds. Moreover,
because of the higher associated trading costs, these funds have a higher fee
compared to traditional mutual funds.
That being
said, long/short funds are an excellent addition to your investment portfolio.
Even the top asset
management companies in india would probably urge you to partake in one
provided you fit their risk profile. However, remember that fund performances
vary and even the top fund managers may make a wrong choice. In the end, it all
boils down to one thing. What’s your goal and how soon do you want to achieve
it? Because high risk can also lead to high rewards. Talk to your advisor and
make an informed decision.
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