Understanding the Basic Types of Mutual Funds
For the novice investor, mutual funds seem like a great investment vehicle.
They offer managed investing, diversification, and SEC regulation.
They are often the first place a financial advisor will send someone new to the stock market.
But they come with their own complexities, which often get overlooked.
Here we will attempt to demystify the different types of mutual funds and why one might choose that type as their investment medium.
The first and major type of mutual fund is the stock fund, also called an equity fund.
These funds invest in shares of stock from various companies they deem to have benefit within the fund portfolio.
Growth Funds Among the stock funds, the Growth fund is one of the most popular.
This type of fund invests in growth stocks; stocks of companies who are developing new products and services, are in good financial order, and are expected to grow faster than other similar companies in the market.
Value Funds Value funds, on the other hand, invest in companies that the fund managers feel are undervalued by the market.
They may have had issues with management or a product, or maybe they are great companies but most investors haven't picked up on them yet.
These funds make a profit when their companies improve in either profitability or popularity.
Index Funds Funds that invest in the same companies as the major indexes are called Index Funds.
They generally track along with the index they are targeting.
One of the more popular index funds follows the S&P 500 index.
An investor would choose this type of fund if they simply want to stay up with market performance, or they cannot decide which other type of fund to invest in.
Sector Funds Sector funds focus on stocks of companies in a certain industry or market sector.
For instance, you might fund sector funds that invest in just biotech, oil and gas, electronics, or banking.
Performance of these funds is highly depending on how well that industry is doing.
They are more vulnerable to changes in a certain market sector than other funds, but also allow for significant profit from a sector that is doing well.
International Funds International Funds are just that - funds that invest in international companies.
If you have heard there are some great opportunities oversees, maybe in China or India, this might be a fund for you.
You purchase shares of these funds with U.
S.
dollars and the fund takes care of purchasing the various shares of stock in the currency of that country.
This is an easy way to get access to emerging markets outside of the United States.
Other types of mutual funds are Bond funds, which consist of bonds from either U.
S.
Government, Corporate, Municipal or International entities.
Total Return Funds combine the two types, investing in both stocks and bonds, to attempt to attain both income and appreciation.
Finally, you can also invest in Money Market Funds, which invest in various short-term money market loans.
You might choose a Money Market Fund if you want low-risk and are willing to settle for a modest gain.
They offer managed investing, diversification, and SEC regulation.
They are often the first place a financial advisor will send someone new to the stock market.
But they come with their own complexities, which often get overlooked.
Here we will attempt to demystify the different types of mutual funds and why one might choose that type as their investment medium.
The first and major type of mutual fund is the stock fund, also called an equity fund.
These funds invest in shares of stock from various companies they deem to have benefit within the fund portfolio.
Growth Funds Among the stock funds, the Growth fund is one of the most popular.
This type of fund invests in growth stocks; stocks of companies who are developing new products and services, are in good financial order, and are expected to grow faster than other similar companies in the market.
Value Funds Value funds, on the other hand, invest in companies that the fund managers feel are undervalued by the market.
They may have had issues with management or a product, or maybe they are great companies but most investors haven't picked up on them yet.
These funds make a profit when their companies improve in either profitability or popularity.
Index Funds Funds that invest in the same companies as the major indexes are called Index Funds.
They generally track along with the index they are targeting.
One of the more popular index funds follows the S&P 500 index.
An investor would choose this type of fund if they simply want to stay up with market performance, or they cannot decide which other type of fund to invest in.
Sector Funds Sector funds focus on stocks of companies in a certain industry or market sector.
For instance, you might fund sector funds that invest in just biotech, oil and gas, electronics, or banking.
Performance of these funds is highly depending on how well that industry is doing.
They are more vulnerable to changes in a certain market sector than other funds, but also allow for significant profit from a sector that is doing well.
International Funds International Funds are just that - funds that invest in international companies.
If you have heard there are some great opportunities oversees, maybe in China or India, this might be a fund for you.
You purchase shares of these funds with U.
S.
dollars and the fund takes care of purchasing the various shares of stock in the currency of that country.
This is an easy way to get access to emerging markets outside of the United States.
Other types of mutual funds are Bond funds, which consist of bonds from either U.
S.
Government, Corporate, Municipal or International entities.
Total Return Funds combine the two types, investing in both stocks and bonds, to attempt to attain both income and appreciation.
Finally, you can also invest in Money Market Funds, which invest in various short-term money market loans.
You might choose a Money Market Fund if you want low-risk and are willing to settle for a modest gain.
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