Know mutual fund objectives before investing
With thousands of mutual funds on the market, how can you choose the ones that are right for your individual needs? For starters, you need to know the objective of each mutual fund in which you plan to invest.
Let's take a look at the investment objectives of some of the most popular types of mutual funds:
Growth funds -- These funds invest in the stocks of growing companies, with the goal of providing investors with capital appreciation.
In plain English, you invest in these funds for the potential to make your money grow. If you invest in these funds, you will almost certainly experience the ups and down" of the market, but if you hold your funds long enough, and they are well managed, you may increase your investment's potential return.
Growth-and-income funds -- As its name suggests, a growth-and-income fund is structured to provide the potential for both growth in value and current income payments, in the form of dividends.
Generally speaking, these funds are less risky than growth funds yet offer lower growth potential. But if you are interested in adding an income stream to your portfolio, these funds may be suitable for your long-term investment goals. Dividends can be increased, decreased or totally eliminated at any time without notice.
International funds -- You can choose from several types of international funds: global funds, which invest in both U.S. and international stocks; international funds, which invest primarily outside the U.S.; country specific funds, which focus on one country or region; and emerging market funds, which concentrate on small, developing countries.
These funds generally invest for growth, but they involve special types of risk, such as currency fluctuations and the prospect of investments being affected by political or economic turmoil.
Bond funds -- When you invest in a bond fund, you are seeking current income, in the form of interest payments, and the chance to help stabilize a portfolio that might be heavily weighted toward stocks.
You can choose from municipal bond funds, corporate bond funds, mortgage-backed securities funds and U.S. government bond funds. Although bonds funds generally contain less investment risk than stock funds, they carry a different type of risk: purchasing power risk.
In other words, the interest payments you receive from your bond funds may not always keep up with inflation. Keep in mind that bond funds are subject to interest rate risk and fund values may decline as interest rates rise.
Money market funds -- These funds invest in short-term debt instruments and are managed to maintain a stable net asset value of $1 per share, however the value of fund can fluctuate and it's possible to lose money.
Many people invest in money market funds if they want to park funds for a short time before investing it elsewhere. You might also use a money market fund as an emergency fund containing six to 12 months' worth of living expenses.
While these types of mutual funds have some obvious differences, they also share two important traits in common. First, financial professionals choose the investments, which is obviously a benefit to you. Second, mutual funds, by owning many different types of securities, offer the advantage of diversification -- though diversification by itself cannot guarantee a profit or protect against a loss in a declining market.