Mutual Funds That Rise When Market Falls

Investors can choose from several types of funds to profit in a falling market.
i George Doyle/Stockbyte/Getty Images

Picking an investment when the stock market is falling can be challenging. There's no telling when the market will bottom out and recover enough to head back up. Investors may want to consider putting their money in mutual funds designed to profit as the market falls.

Bond Funds

Bond mutual funds, like single bonds, have an inverse relationship with the stock market. As the stock market falls and company share prices drop, investors tend to put more money into bonds. This increased demand causes new bonds to be issued at a higher interest rate, which attracts new investors and further increases a bond fund's earnings. The higher interest rate makes it more expensive for companies to borrow money and further depresses stock prices, making bond funds look even more attractive. Bond funds can reinvest the interest payouts each individual bond generates to further increase the fund's share price.

Commodity Funds

Depending on which commodity or commodity groups are included, a commodity mutual fund can move with the stock market, against the market or be largely unaffected by the market. For example, commodity funds that hold copper, which is widely used in the construction industry, will move in sync with housing demand and the overall market.

Gold mutual funds and U.S. Dollar Index funds generally rise in value as the market falls. A falling market will have little effect on commodities that rely on supply and demand, weather conditions, and international events to determine their prices. These include agricultural mutual funds that hold wheat, corn and soybeans.

Reverse Index Funds

Reverse index mutual funds are designed to move up when the corresponding index goes down. There is a reverse index fund for virtually every index, including the Dow Jones Industrial Average, S&P 500 and Nasdaq 100. For example, if the Nasdaq 100 loses 3 percent, the fund should go up by 3 percent. Some reverse index funds use leverage to increase the mutual fund’s return. For example, if the fund has doubled the leverage and the S&P 50 drops 3 percent, the fund will increase 6 percent in value.

Actively Managed Reverse Funds

Actively managed reverse mutual funds hunt for stocks that are in a serious decline. The stocks are held for a short time then replaced with other ones that are falling. In addition to stocks, actively managed funds may hold commodity futures and commodity futures options or index "put" options, or they may short the index futures market. The fund manager's goal is to profit from numerous quick returns against the market.

the nest