Looking to purchase a mutual fund? Below is a description of the basic types of funds that are available:
·Money Market Funds have relatively low risks compared to other mutual funds. They are limited by law to certain high-quality, short-term investments. Money market funds try to keep their net asset value (NAV) at a stable $1 per share, but share prices can fall below $1 if portfolio investments do poorly. Losses are rare, but possible.
·Bond/Fixed Income Funds have higher risk than money market funds, but may typically also pay a higher return. Bond funds are not limited to high-quality or short-term investments, so they can vary dramatically in their risks and rewards. Because interest rates change frequently, the market value of bonds can rise (when interest rates decrease) and fall (when interest rates rise). Therefore, investors can lose money in a bond fund.
·Equity/Stock Funds involve more risk than money market or bond funds but offer the highest potential returns. Usually, these funds focus on capital gains growth and not so much on the size of dividends paid. A stock fund's value can rise or fall rapidly over a short time, but, historically, stocks have outperformed other types of investments over the long term. A longer time period - at least five to ten years - is typically recommended for this investment objective.
·Balanced Funds contain a mixture of stocks and bonds (e.g., 60% stock and 40% bonds). This type of fund is a good beginning investment because it diversifies its portfolio with two different types of assets.
·Sector funds specialize in certain markets, such as health care, technology, or precious metals.
·Index funds attempt to hold the individual securities in major indexes such as the Standard and Poor's (S&P) 500.
·Asset-Allocation funds are a blend of stocks, bonds, and money market funds directed to an investor's risk tolerance. They typically contain several portfolios (e.g., aggressive growth, growth, moderate growth, and income), with varying proportions of each asset class.
·International/Global Mutual Funds invest in securities outside the United States and in both foreign and United States stocks, respectively.
To find a mutual fund that is right for you, consider the following suggestions: · Select fund categories that match your investment objectives. · Look for mutual funds within your targeted fund category that have consistent returns, good past performance, and low fee structures. · Determine how long the fund manager has managed the fund and look for years of experience. · Find an 800 number for the fund and request the most recent prospectus or look on the Internet. · Go to the library to use mutual fund reference books such as the Weisenberger Investment Company Service and Morningstar's Mutual Funds. · Invest before a capital gains or dividend/interest distribution, particularly at the end of the year.