Many people think
mutual funds are a good place to invest because they are
professionally managed and they diversify your investments and
allow you to redeem your shares quickly. There are different
kinds of mutual funds for different investment needs. To
identify the type of fund that could help meet your needs, ask
yourself:
1. |
What is my goal? |
|
Safety, income and growth are common investment goals.
What do you want your investment to do for you? |
2. |
What is my time frame? |
|
Is there something you want to buy in a couple of
months? Or do you have a goal - like going to college
- that may be several years away? |
3. |
How do I feel about
risk? |
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Will you take some risk in the hope of increasing your
potential reward? Or are you more cautious, wanting to
protect the money you already have? |
Once you have
answered these questions, check out different kinds of mutual
funds to see how each might help you reach your goals.
Money Market funds
Money market securities are short-term debt instruments issued
by large companies or the government. When they issue these
securities, they are borrowing money and promising to repay it
within a short period of time - anywhere from one day to one
year.
Money market funds
invest in these short-term fixed-income securities, such as
bank certificates
of deposit (CDs) and commercial
paper. Generally, these securities have high credit
ratings. A high credit rating makes it very likely that a
security's issuer will keep its promise to repay its debts.
The investment
objective of a money market fund is to keep the value of your
investment stable, while providing the potential for income.
Money market fund managers strive to keep the net asset value
of their funds at $1 per share. While there is no guarantee
that money market funds can do this, and they are not insured
or guaranteed by the United States government, they are
generally considered to be pretty safe investments. Money
market funds, however, tend to have lower returns than other
types of funds because of the relative safety of a stable
share price. If you plan to use your money soon, you might
want to consider investing it in a money market fund.
Bond funds
When a business or government needs to borrow money for a
longer period of time, it might issue bonds. Bonds are the
financial obligations of the corporation or government that
issued them. When an individual purchases a bond, that
individual is loaning money to issuer. Bond issuers promise to
make regular interest payments on the money they borrow and to
repay the amount they borrowed when the bond matures. Because
bonds usually pay interest at a set or fixed rate, they are
called fixed-income investments.
Bond funds usually
invest with the goal of providing income. The level of income
a fund produces generally depends upon how much risk the fund
takes and the maturities of the bonds in its portfolio. Bond
funds offer higher income potential than money market funds,
but they also involve more risks.
One such risk is credit
risk. There are agencies, like Standard & Poor's
and Moody's, that monitor a bond issuer's ability to meet its
financial obligations relating to the bonds. These agencies
review and rate the issuer's bonds based on the agency's
reviews of an issuer's financial statements. If a credit
rating falls, then the market value of the bond may fall. This
is just one example of an investment risk. The fund's prospectus will
describe the principal investment risks associated with the
fund.
Also, you may make
or lose money when you sell shares. That's because a fund's net
asset value goes
up and down depending on what happens in the bond market. But
if you are looking for more return potential than is offered
by a money market fund and less risk than a stock fund, a bond
fund might be your best investment choice.
Stock funds
An investor who buys stock in a company receives equity - part
ownership - in that company. Each share of stock participates
equally in the company's profits and losses. That's why stocks
are called equity investments. A stock mutual fund may have
investing for growth as its investment goal. The fund's share
price will go up and down with the stock market. This is
called volatility.
If you have to sell your shares when the market is down, you
may lose money. But if you are able to maintain a long-term
focus - at least four to five years - your investment in a
stock mutual fund has the potential to ride out short-term
market volatility and grow over time.
It's important to
remember that stock mutual funds have investment risks
associated with them. One such risk is equity risk, which
means that the share prices of the holdings in a fund's
portfolio may go down and, as a result, the fund's value may
decline. There are also risks associated with the different
size companies that a fund may invest in. For example, stock
prices of smaller companies may fluctuate more sharply than
the stock prices of larger companies. One reason for this is
that the stocks of smaller companies may trade less frequently
or in smaller numbers than the stocks of larger companies.
If you understand
volatility and are willing to take on more risk in the hope of
reaching a long-term goal - like paying for college - you may
decide to invest in a stock fund.
Hybrid funds
A hybrid fund is a mutual fund that invests in both stocks and
bonds. Generally, the investment objective of these funds is
to provide income (from both stock dividends and
the interest from bonds) and to seek the long-term growth of
the fund's assets. Hybrid funds may have the terms "asset
allocation" or "balanced" as part of their names. The fund's
prospectus will describe the principal investment strategies
and investment risks associated with these types of fund. |