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Bear Market Mutual Funds

This article recommends some techniques, which are useful in cases when we have bear market. From time to time it is possible for the market to experience decline, so the investors look for other investments to compensate for the potential losses.

Many investors try to take advantage of bear markets. But this also represents a risky investment, because you never know when the opportunity may turn against you and as result damages to your portfolio may be encountered. Many investors rely on their correct assessment when the question comes to down markets, but they should never forget that the effect may be turned into a defect. Additionally, investing in down markets is not suitable to risk averse investors, since it hides many traps along the way.

The following mutual funds are suitable for investment when we have bear market. They are presented in order of increasing potential returns and increasing levels of risk.

  1. Money Market Funds

    Money market funds represent a good parking place for your money when there is a bear market thanks to safety they provide. Additionally, they are better than savings accounts due to the much higher interest rates. Another advantage of money market funds is their higher liquidity as compared to the other types of funds. Many investors apply the following tactic when there is a bear market: they sell the current mutual fund and invest the resources in money market fund.

  2. Bond Funds

    A common tool for balancing an investment portfolio, bond funds are popular with their lower levels of risk. Nevertheless, bond funds do experience from time to time the so called "bear markets". Occasionally, bond funds are in a better condition even though stock markets experience lower degree of performance. Investment grade bond funds represent the type of bond funds that has proved their efficiency during down markets.

  3. Market Timed Funds

    In times of bear markets, the professional money manager may decide to convert your shares into cash if they sense that the market is about to experience a decline. As a result some mutual funds ignore the replacement of stocks in a portfolio for other types of securities. Through the services of a fund manger, the need to make the decision of converting your fund shares into money market shares is eliminated.

    If you are interested in timing the market, carefully examine the alternatives you have at hand. This can be done through a search on the Internet about market timed mutual funds. Additionally, hedge funds, which are famous for their timing of the market, may be used by some investors that hold the required accreditations.

  4. Sector Funds

    The down market can be a good opportunity for profit increase for some industries. For example, income oriented utility funds succeed in proficiently evading the negative effects of a bear market. Inexpensive or necessary product oriented sectors (food, health care goods) generally don't suffer the negative effects of a down market. On the other hand, such sectors as technology and natural resources may feel the negative effect in its full power when recession occurs. Other sectors hurt by the bear trend of the market are those focused on luxurious products.

  5. Bear Funds (Short Funds)

    This type of mutual fund functions in such a way that investors enjoy profitability only at times of down markets. Being the last in our list, the bear funds hold the greatest level of risk as compared to the preciously mentioned funds. This is due to the fact that short funds represent an aggressive investment approach. As such, the chance of losing money is greatly increased if the stock market averages a gain of 11-12% per year. The short fund may be either actively managed or inverse index fund. Under the latter, entire indexes are being shorted. Additionally, the possibility of doubling the inverse of a certain index is also included among the list of potential uses of inverse-index funds.


After the careful analysis of the history of down markets, junk bonds, t-bills, left gold and real estate funds have not been included in the list. This is so due to their inconsistent performance under bear market conditions. Many financial advisors recommend diversification as a tool of evading the negative effects of a down market. Such diversification can be done by the purchase of US and International concentrated funds, which consist of bond funds, growth funds, value funds and such of different size. Diversification greatly alleviates the potential risk and losses that you may incur during a down market, but always keep in mind that it doesn't guarantees you a 100% protection.

The business cycle always follows the downward-upward trend in the long term. So, what today goes down may tomorrow go up.

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