Objectives Are They Compatible with Your Level of Risk

The objectives and policies of the fund generally appear near the front of the prospectus. The objectives describe the type of securities the fund invests in as well as the risk factors associated with the securities. For instance, if the prospectus states that the fund will buy growth securities, the investor should not be surprised to find that most of the stocks will have high price-earnings ratios and may include risky small-cap stocks.

The investment policies outline the latitude of the fund manager to invest in other types of securities. This could include trading futures contracts, writing options to hedge bets on the direction of interest rates or the market, or investing in derivative securities to boost the yield of the fund. Many so-called conservative funds, which supposedly only hold blue-chip stocks, have on occasion resorted to small-company and offshore stocks to boost returns. The greater the latitude in investing in these other types of securities, the greater the risk if events backfire.

Determine whether the objectives of each of the funds are compatible with your level of risk tolerance.

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