What is an absolute return mutual fund?

The financial system is as dynamic as the multicultural world because it implements various investment and savings alternatives, such as savings account, certificates of deposit and absolute return mutual funds. But, What is an absolute return mutual fund?

Also known as mutual fund, mutual fund or absolute return mutual fund, it is an investment instrument that combines contributions from several people (individuals, companies, etc.) to invest in stocks, bonds and foreign currencies safely, that is, ensuring return on investment.

If it’s still not entirely clear to you, don’t worry! We have prepared a small entry that deals with exactly this.

What is an absolute return mutual fund?

Unfortunately, there is no single answer to this question because, unlike the savings accounts, each investment company handles its own mutual fund concept and manages it differently. This happens because there are different types of mutual funds, including some where the return is not absolute, but relative. But we will see that later.

Despite the distinctions between the concepts, we could say that the objective of absolute return mutual funds is always the same: to earn money (regardless of market conditions) through operations that are conditioned to a lower risk for the investor, at least when compared to traditional mutual funds.

However, How important is the term “absolute return” in this equation? The answer is simple. And it is that, the profitability of the fund is ensured by a hedge fund. This allows banks and financial companies to offer a positive return, regardless of what happens in the market.

Arguably, this is the main difference between absolute return mutual funds and traditional mutual funds, since the former are designed to invest at low risk (such as Treasury bonds) and thus minimize the risk of loss. In other words, the absolute return mutual fund assures investors that they will make money, no matter what..

What is an absolute return mutual fund?

How does an absolute return mutual fund work?

To understand how the absolute return mutual fund works, it is best to compare it to a relative return mutual fund. Mutual fund performance is generally calculated based on a benchmark index. For example, the performance of one of the most capitalized equity mutual funds in the United States is benchmarked at S&P 500 Index. Instead, an international large-cap relative return mutual fund would focus on other benchmarks, such as the Index MSCI EAFE.

What banks that offer relative mutual funds do is determine how well their investments have done by comparing them to the index they use as a benchmark. For example, if a mutual fund returned 10% and its benchmark index returned 7%, then the relative return would be 3%. In the case of absolute return investment funds, we work with the total return of the fund, that is, if we follow the case of the example, it would be 10%.

Now, this isn’t to say that relative-return mutual funds aren’t important because, in this scenario, investors could determine if their money did much better than its benchmark index did.

Are Absolute Return Mutual Funds Profitable?

They are, although the percentage return will depend on how well the market works. However, it could be said that investors in this type of fund never lose, since they are designed to give the client what they promise. So much so that managers work hard to earn a positive return on investment, regardless of the market and the very indices they sometimes use as benchmarks.

Do you think relative return mutual funds could be better? It depends. If your mutual fund outperforms the benchmark by 10% you might think you made a lot of money. After all, the fund manager delivered as promised and even outperformed the benchmark (let’s assume, the S&P 500) by a wide margin, right? Maybe not so much. Rather we would advise you not to shout “victory” so quickly.

Keep reading: What is the difference between absolute return and relative return?

Keep in mind that even if the fund’s performance is positive, you could have lost money. For example, What would happen if you found out that that benchmark that was used dropped 15% in the year? Possibly, you would not be happy with your investment fund. Why? Because this means that you lost 5% of your capital. This is precisely the difference between absolute and relative return investment funds: with the former, you will not lose. With the latter, losing is an option, although, to be fair, the gains could be higher.

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