This basic investment guide should make picking and understanding a mutual fund investment simpler for you. Picking a fund that fits you is not rocket science once you know your basic choices.
Our basic investment guide will classify mutual fund investments into four categories based on what a fund invests in, where they invest your money. The vast majority of funds fit into one of these categories: money market funds, bond funds, stock funds, balanced funds.
MONEY MARKET FUNDS are the safest of all mutual fund investments. They pay investors interest in the form of dividends. The price or value of their shares does not fluctuate. Money market funds invest your money in high-quality safe short-term IOU’s of the U. S. government, banks, other major corporations, and/or other government entities. As interest rates go up, interest earned and dividends paid by these funds do also. When rates fall, dividend yields fall. Money market funds offer investors high liquidity. You can get your money out of them quickly and easily, at no cost with little fear of loss.
BOND FUNDS are the second type of mutual fund investment, and are the second safest. They invest in long-term debt instruments called bonds. The bonds held by a bond fund can be long term, intermediate term, or shorter term in nature. They can be issued by the U.S. government, other government entities, and corporations. Municipal bond funds pay dividends that are tax-exempt or tax-free. Investors in search of higher income in the form of dividends often invest in bond funds. Bond fund share prices flucuate, so there is risk involved in these mutual fund investments.
STOCK FUNDS are the most popular and the riskiest type of fund. The price of their shares will flucuate, sometimes going to extremes. When you hold shares in a stock fund you are invested in stocks. Generally speaking, as goes the stock market, so goes the value of your stock fund. The objective of these funds: growth (higher returns), perhaps with modest income from dividends. There are many varieties including growth funds, value funds, international funds and specialty funds.
BALANCED FUNDS are a blend of the other three just discussed. A traditional balanced fund is a mutual fund investment that invests almost 60% of its assets in stocks, almost 40% in bonds and what little remains in short-term debt (the money market). So, if you hold shares in a balanced fund, you are invested primarily in both stocks and bonds. Newer types of balanced funds include lifestyle funds and target retirement funds. These can be conservative, moderate, or aggressive in nature.
MUTUAL FUND INVESTMENT GUIDE SUMMARY
MONEY MARKET FUNDS for high safety, liquidity, current income. BOND FUNDS for higher income, with only moderate safety. STOCK FUNDS for growth, perhaps with income, with significant risk. BALANCED FUNDS for moderate growth and income, risk depends on specific fund.