Mutual funds are a common investment for individuals who are investing for retirement or a college education for their children or just trying to earn a reasonable return on their money. A mutual fund consists of a group of investments, which can be stocks, bonds, alternative investments or a combination of all of these, managed by a fund manager. By grouping these investments together, the fund manager hopes to maximize investor returns while minimizing risk. Here’s what you need to know about mutual funds.
4 Mutual Fund Types
Four main types of mutual funds are available:
– Money market funds
– Bond funds
– Stock funds
– Target-date funds
Mutual funds are a good way to diversify your investment portfolio and reach your financial goals. So you can better choose the right ones for your investment strategy, here’s what you need to know about the four different types of mutual funds:
1. Money Market Funds
Money market funds include investments that are high quality and short term. These investments are issued by federal, state and local governments — and by US corporations. Money market funds are a relatively low-risk option.
See: 20 Best Mutual Funds
2. Bond Funds
Bond funds hold bonds, which are debt instruments, as opposed to stocks, which represent equity. Many different kinds of bonds exist, including government bonds and corporate bonds. So-called “junk” bonds are a very risky option. The level of risk of a bond fund can vary greatly, depending on the types of bonds it holds.
3. Stock Funds
Stock funds are the most common type of mutual funds, and they are what most people think of when they hear the term “mutual fund.” A stock fund holds the stocks of various companies. Different types of stock funds exist, and the risk level varies considerably:
– Growth stock funds focus on the goal of increasing the value of the investor’s portfolio.
– Income funds feature stocks that pay regular dividends.
– Index funds track a particular stock index, like the Russell 2000 or the Standard & Poor’s 500 index.
– Sector funds include stocks in a particular industry.
4. Target-Date Funds
Target date funds are designed for investors who are investing at a particular point in time, such as retirement or a college education. These funds invest in a mix of stocks, bonds, money markets, and other investments, and the ratio of these investments shifts over time. Target date funds are riskier early on and become more conservative as the target date nears.
Finding the Best Mutual Funds
To determine the best mutual funds for your investing strategy, consider how long you expect to hold the funds and how much risk you are willing to take. You can find listings of top mutual funds in each category from resources like Morningstar, which ranks mutual funds and other investments. To compare mutual funds, look at the fund’s performance over the past one-, three- and five-year time periods.
You can buy mutual funds from a broker or directly from the fund. You’ll pay a fee or commission on each transaction, so consider how that will impact your investment. It might make more sense to take a larger position in two or three funds rather than smaller positions in a dozen funds because of the commission structure.