We all live in a subprime world and like a submarine, danger to your mutual fund portfolio could be lying beneath the surface. It looks like one or more of the subprime lending companies may not make it and the disease is spreading to prime mortgage lenders, banks and brokerage houses. If you own a high income fund, financial institutions/bank/thrift/brokerage house fund, or a real estate fund, the subprime meltdown is effecting you.
The subprime debacle illustrates the importance of two mutual fund investment rules:
- Review the holdings of any fund you own or are thinking of buying. The top holdings are available for a number of sources, including by looking up the fund on the MUTUALdecision website. The fund itself must publish a complete list of holdings each quarter. You can't go by the name of the fund alone. You need to review its holdings to determine its risk level. For example, one financial institutions fund may own predominately blue chip banks, while another may have a significant exposure to, gasp!, subprime lenders.
- Sector funds are more concentrated then general market funds. That’s both good and bad. If you pick the right sector, you'll do very well but if, for example, you're invested in a sector fund such as a financial fund with a big subprime mortgage exposure, well, you see my point. So just remember that sector funds are riskier investments.
