Understanding Mutual Funds
Although mutual funds seem complex, they’re simply professionally managed investment funds that combine money from investors to buy other securities. These can be stocks, bonds, and other assets. Many retirement plans offer the option of investing in mutual funds.
These are some familiar types of mutual funds.
These funds invest in both stocks and bonds, sometimes other types of assets, and are referred to as asset allocation funds. The intent of these funds is to reduce the effects of market volatility by investing in varying asset classes that aren’t related with one another.
Target Date Funds
These are sometimes called a lifestyle funds. These funds invest in both stocks and bonds. They’re designed to provide a simple investment solution through a portfolio that automatically becomes more conservative as your retirement target date approaches. As of March 2018, 80% of 401(k) plans offer target date funds.
The purpose of these funds is capital appreciation, which simply means an increase in the price of the stock. Instead of paying dividends, the companies in growth funds reinvest their earnings for research, development, and expansion.
Aggressive Growth Funds
These are often chosen by investors whose primary focus is maximizing capital gains. Growth funds that are aggressive invest in expanding companies that have the potential to yield substantial gains. Oftentimes, these companies are start-ups or from current industries and involve more risk and volatility in price.
Growth and Income Funds
These funds focus on growing the principal, but they also generate income because they invest in the earnings of growth-oriented companies that pay dividends.
Fund of Funds
Simply put, these funds invest in other mutual funds. A fund of funds holds many shares of differing mutual funds, and they’re created to attain greater diversification than traditional mutual funds do. Each fund within a fund has expenses, so be mindful that they can be as much as it would be to invest in several different funds.
These funds invest in securities that make up a market index. For example, an index fund based on the Standard and Poor’s 500 would invest in all or a representative sampling of the stocks that make up that index. Because securities in an index fund’s portfolio rarely change, management costs are generally lower than those of actively managed funds.
These are mutual funds that invest in companies which the portfolio manager determines are underpriced by fundamental measures. Assuming that a company’s share price will not remain undervalued indefinitely, the fund looks to make money by buying before the expected upturn.