This basic investment guide should make picking and understanding an investment fund easier for you. Choosing a fund that is right for you is not rocket science once you know your basic choices.
Our basic investment guide will classify investment fund investments into four categories based on what a fund invests in, where they invest your money. The vast majority of funds fit into one of these categories: money market funds, bond funds, equity funds, balanced funds.
MONEY MARKET FUNDS are the safest of all mutual funds. They pay investors interest in the form of dividends. The price or value of their shares does not fluctuate. Money market funds invest your money in safe, quality-assured short-term IOUs by the U. S. government, banks, other major corporations, and / or other governmental entities. As interest rates rise, so do interest earned and dividends paid by these funds. When interest rates fall, dividends fall. Money market funds offer investors high liquidity. You can get your money out of them quickly and easily at no cost for a little fear of loss.
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BOND FUNDS are the second type of mutual fund investment and are the second most secure. They invest in long-term debt instruments called bonds. The bonds held by a bond fund can be long-term, medium-term or shorter. They can be issued by the US government, other government entities and companies. Municipal bond funds pay dividends that are tax-free or tax-free. Investors in search of higher income in the form of dividends often invest in bond funds. The bond fund's stock prices fluctuate, so there is risk involved in these mutual funds.
STOCK FUNDS are the most popular and riskiest type of fund. The price of their shares will fluctuate and sometimes go to extreme amounts. When you own shares in a mutual fund, you invest in shares. In general, just like the stock market, so does the value of your equity fund. The goal of these funds: growth (higher returns), perhaps with a modest income from dividends. There are many varieties, including growth funds, value funds, international funds and special funds.
BALANCED FUNDS are a mix of the three others just discussed. A traditional balanced fund is an investment fund that invests almost 60% of its assets in equities, almost 40% in bonds, and what is left only in short-term debt (the money market). So if you own shares in a balanced fund, you are primarily invested in both equities and bonds. Newer types of balanced funds include lifestyle funds and targeted pension funds. These can be conservative, moderate or aggressive.
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