Most people have heard of mutual funds. Mutual Funds are the least complicated way to invest if you are a newcomer to the market, or you don’t have time to buy, diversify, and trade stocks consistently within your portfolio. The easiest way to explain mutual funds are to think of them as a basket, a basket of fruit. Say for instance you have a basket, and you buy nothing but apples and put them in a basket. Think of the apples as stock(shares of a company); If you put nothing but apples in your basket(mutual fund) then it is either called a:
1. Stock Fund-A mutual fund that collects nothing but stocks
2. Bond Fund-A mutual fund that collects nothing but bonds(securities from the government)
Say for instance you put in your basket(mutual fund) Apples(stock) and Oranges(bonds), that would be called an Balanced Fund:
3. Balanced Fund-A mutual fund that collects both stocks and bonds
These are the most commonly bought mutual funds. The reason why they are the most popular among investors is because they are easy to buy, and they usually don’t require much capital(money) for you to invest in them. Now lets look at the most common OBJECTIVES of these funds. Mutual funds have objectives(simply a investing style set forth by the fund manager) that each fund tries to meet. Just like everything in life, every mutual fund has a purpose, an goal that it wants to achieve for its investors(you). Here is a quick run down on the different objectives the most common mutual funds have:
1. Growth Fund-simply wants to provide growth(the increase of the principal you put in the fund when you bought it) for the investor(you).
2. Income Fund- wants to provide income for its investors. Most funds that are income funds are loaded up on bonds, and stocks that pay high dividends. The most common income funds are bond funds.
3. Dividend Fund- dividend funds are most likely stock funds that have nothing but high dividend paying stock in them to pay its investors. If buying for income, the yield of the fund(its fund yield) is the most important part to look at. P.S will talk more in depth about that later…..
These are the most common objectives for the funds you can buy. Here is another list that provides the most common uses for the funds in a portfolio.
1.Stock funds- |Risk=medium/High| Reward=High|
For growth of capital. In laymen s terms, most people buy this type of fund so it can grow their money to keep pace or to exceed the cost of inflation(rise of the price of goods and services over time)
Usually bond funds are used to preserve capital and produce income in retirement. Money put in Bond funds CAN decrease in value, but usually the income produced from monthly dividends from these funds offset SOME losses due to fund performance
3. Balanced Funds-|Risk=Low/Medium|Reward=Medium/High|
These funds are usually pretty good at protecting from large losses due to the fluctuations of the stock market. It won’t protect you FULLY, but it will lessen the blow dramatically if the market tanks.
Did you know you can actually build a portfolio of mutual funds? Just like you can build a portfolio of stocks you can build your portfolio solely of mutual funds. The reason why some people do this, is to limit their exposure of being to heavy in one area. Put all your money in Bond funds, and you could run the risk of your money not keeping up with inflation. Put all your money in stocks, and you COULD lose more money off your principal than you are willing to stomach. So mix it up, and diversify!!!