What Is a Conservative Mutual Fund or Stock?

A conservative investment style can offer some protection from market downturns.
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Investing is all about making your money grow. When you hand over your hard-earned cash, you're saying that you trust the management of Company X, Fund Y or Bond Issuer Z to earn you a profit without losing your money in the process. Of course, there's a catch. Investments that bring you a big return are riskier, and also offer the possibility of losing a big chunk of your capital. You can minimize that risk by investing in conservative stocks or funds, which provide a reasonable return while shielding you from market downturns.

Conservative Stocks

Stocks are the mainstay of high-risk, high-reward investing. They're often referred to as "equities," since each share represents a small part of the equity in a given company. Some stocks are riskier than others. Newly established companies, companies in new or rapidly-changing sectors and companies in emerging foreign economies are all considered risky. You win big when they pay off, but lose big when they fail. Stability is the hallmark of a conservative stock. They're typically well-established companies with solid management, operating in mature sectors of a mature economy.

Dividend Stocks

Conservative investors often choose stocks that pay a consistent dividend to shareholders. Companies pay dividends as a fixed amount per share, or a percentage of profits, as an encouragement for investors to buy and hold their stock. This makes dividend stocks a profitable investment, even when share prices are flat. Some companies issue "preferred shares" that consist only of a share in the dividends, without ownership in the company itself. These act more like bonds than stocks, making them an especially conservative investment. They can usually be converted to common stocks, so if the share price skyrockets you can convert them and take advantage.

Conservative Mutual Funds

If the idea of laboriously researching and investing in individual stocks doesn't appeal to you, a conservative mutual fund might be more your style. Their managers and analysts research potential investments full time, so they know their stocks the way you know which kid will eat which vegetable. Conservative mutual funds offer a lot more flexibility than investing in individual companies, because each one represents a diversified pool of investments. They'll often hold individual "conservative" stocks, but they can also buy higher-risk companies for the potential yield, and balance them with more conservative vehicles including bonds and interest-bearing investments.

Stocks vs. Bonds

Bonds are an important part of a conservative portfolio, because as a rule they go up when stocks go down. Essentially, a bond is a promise by the issuer to provide you with a set return on your investment at a set maturity date. Their rates are typically higher than straightforward interest vehicles such as CDs, but lower than the returns on stocks. Bonds offer other benefits as well. The income from municipal bonds is tax-exempt, making them especially useful once you've topped out your IRA. Bonds can also be traded, and are in high demand when stocks are down. That's why bonds are important in a conservative mutual fund, because they act as the other end of the seesaw. When stocks head south, bonds go up and help limit the damage.

A Balanced Portfolio

The goal in a conservative fund is to achieve a well-balanced portfolio. That means it's invested in a wide enough range of stocks, bonds and other vehicles to give you a reasonable return on your investment, regardless of the economic weather. Some funds do this consistently better than others. As an investor, you can turn to market-research services such as Morningstar to tell you which are the best performers.

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