Mutual funds are a popular investment vehicle simply because they offer a number of features to suit the objectives of many types of investors.
They provide a number of features, including built-in diversification, professional management, convenience, low investment minimums, and a wealth of investment choices all in one package. Mutual funds may diversify within asset classes; for example, a growth fund may invest in a portfolio of stocks. Or the fund may diversify across asset classes when a balanced mutual fund invests in a variety of stocks and bonds, for instance. Whatever the case, diversification generally helps reduces investment risk and provides the potential for better long-term returns.
Often, mutual funds belong to a “mutual fund family.” You may be able to shift your investment among different types of mutual funds, often with no more than a phone call. That way your portfolio can easily be tailored to suit your financial situation and your expectations about the market. However, transfers among a fund family are considered sales, which may result in paying capital gains taxes if the fund being sold has appreciated.
On the other hand, some investors would never surrender control of their investments. Part of the thrill of investing is knowing that when they succeed it was due to their own decisions, these investors might say.Individual comfort level plays a big part in your investment choice.
There are thousands of different mutual funds offered on the market. They range from funds that include a broad variety of investments to funds that invest exclusively in single securities or narrow sectors of the market. With the many different investment styles and objectives, there’s bound to be a number of mutual funds that are suited to your investing profile. Each of these funds has expense, risk, and return characteristics. Be sure you understand these characteristics before you invest.
Fund investors can cash in on any business day. When you sell a stock, you must wait three business days before the trade settles and your money is released. Mutual fund investors often cite transaction ease as an inviting factor. And it is hard to beat the convenience of having records and transactions handled for you, while periodically receiving a detailed statement of your holdings.
Aggressive growth funds, sometimes known as “small-cap” funds, seek maximum capital gains. They invest primarily in the stock of smaller, less established companies. Since these companies generally pay little or no dividends, aggressive growth funds rely on capital growth for returns. These funds tend to be the riskiest of growth-oriented mutual funds. Investments in small companies and emerging markets securities are more volatile and carry greater risk than securities of large companies.
Sector funds invest in specific industries or sectors of the economy, such as communications, aerospace and defense, or health care. While they may be diversified within a particular sector, they lack broad diversification. This increases their investment risk. These funds typically seek long-term capital appreciation.
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