Your Basic Guide To Mutual Funds

What Is A Mutual Fund?

A mutual fund is simply a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the pooled money into specific securities (usually stocks or bonds). When you invest in a mutual fund, you are buying shares (or portions) of the mutual fund and become a shareholder of the fund.

Mutual funds are considered by some to be one of the best investments ever created because they are very cost efficient and very easy to invest in (you don’t have to figure out which stocks or bonds to buy).

There are many varieties of mutual funds, and each one will have different strategies and different goals. Before you begin searching for your particular mutual fund match, you should know what your investment objectives are. Mutual Funds are categorized by their stated policies and objectives. The following is a list of, and descriptions pertaining to, a few of the most basic types:

Types of Mutual Funds

Equity Income Fund:

This is a mutual fund that invests in high yielding common stocks and is intended to provide current income and protect the invested capital. The funds invest mostly in high value common stocks, some convertible securities and an assortment of preferred stock, junk bonds and high grade foreign bonds.

Aggressive Growth Funds:

When your risk tolerance is high aggressive growth funds may be suited to your style. These are what investors call speculative investment vehicles, because they buy stocks from small, untested companies whose stocks tend to be more volatile. Aggressive growth funds are popular when the market is doing well but when the market is performing poorly, they can take substantial losses. The objective is to get big profits from capital gains. To achieve this goal, aggressive growth funds may use turnaround situations, buy on margin, use hedging techniques or sell short.

Growth Funds:

The goal of a growth fund is to increase the value of the investment. This is called capital appreciation. The objective is long term growth with the end result of achieving hefty capital gains when the securities are sold. Growth funds generally put most of their investments into stable, established large or mid-cap firms that have better than average growth outlooks. These are seen as long term investment vehicles for young aggressive investors who want to increase capital.

Bond Funds:

A mutual fund that invests with income as the first goal. Because bonds are a loan to the issuer the value of the bond price varies with changing interest rates. Bond funds can be bought and sold quickly and are considered more liquid than a direct bond investment. Here are some Bond Fund variations to consider:

• Municipal bond funds which use tax exempt bonds that are issued by government entities.

• Corporate bond funds which reflect debt obligations of U. S. Corporations.

• Mortgage Backed Securities Funds which reflect residential mortgages.

• United States Government Bond Funds which use treasury or other government securities.

Balanced Funds:

The strategic goal of a balanced fund is to balance returns on current income and long term capital gains. Balanced funds tend to encompass a quarter to a half of the portfolio in bond securities in order to keep a high level of current income, but the funds may shift the balance toward capital appreciation or back toward higher current income. The more fixed income securities (bonds) in the portfolio, the higher the income will be.

Stock Funds:

Stock funds generally have a higher risk than most bond funds and do not offer current income. Stock funds are used to increase value; sometimes referred to as “growing your money”. Stock funds may also be called Equity Funds, Growth Funds, Value Funds, or Blend Funds.

Index Funds:

This is a group of stocks that focuses on a segment of the market. The strategy is to match an index such as the Standard and Poor 500 or the NASDAQ. These funds tend to have low operating costs because the point is simply to match an index. Index Funds may be international such as Global funds, Foreign Funds, Country Specific Funds, or Emerging Market Funds, or Sector Funds which concentrate on a segment of the market.

Growth and Income Funds:

This type of fund is related to the Balanced Fund because the goal is to achieve both long term growth and current income. The difference is the primary strategic goal of big capital gains. These funds can generate a big return but increased risk is associated with the potential for good returns. Consider this type of fund if you can tolerate price volatility and tend to be a risk–taker.

As with all investment decisions, you should consult your certified financial planner to learn more about the investment options best suited to your financial needs. This article is not intended to be a substitute for expert advice from a financial professional.