If you are considering investing your money, a great option to consider is a mutual fund. Many of us have heard of mutual funds, but do not have a clear idea what they are. Here is a breakdown of what they are as well as the different types.
What Is a Mutual Fund?
A mutual fund is a managed portfolio of stocks and bonds. Basically, people’s money is pooled together then managed by an investing professional for a fee. If you are a busy individual and don’t have to time to keep on top of your investments, this can be a possible solution. Moreover, since mutual funds offer diversification, the risk is mitigated for your money is more spread out rather than in one stock.
Different Types of Mutual Funds
If it is your first time delving into mutual funds, you might be surprised by the variety. Basically, there are active and passive mutual funds. Active are constantly managed, while passive mutual funds are not. Here is a list of the most common types of mutual funds:
- Money Market Funds: short-term fixed income securities such as treasury bills. Though safer, they tend to give a smaller return.
- Fixed Income Funds: buys investments that pay a fixed rate of return such as government bonds.
- Equity Funds: invests in stocks and are higher risk since there is an increased chance you can lose money. However, they tend to grow more quickly.
- Balanced Funds: invest in a mixture of equities and fixed income securities. They attempt to balance the goal of achieving higher returns against the risk of losing money.
- Index Funds: passive funds that attempt to replicate the performance of broad market indexes such as S&P 500 or the Dow Jones.
- Specialty Funds: can target a particular sector, such as technology or health. On the other hand, they can choose to target a specific region of the world. The foremost are called Sector Funds and the latter is called Regional Funds. There are also Socially-Responsible Funds which adhere to certain guidelines and beliefs such as not investing in “sin” industries like alcohol or tobacco.
- International Funds: only invest in assets outside of your home country.
- Global Funds: invest in assets not only outside of your home country but also within.
One key thing to keep in mind is once a fund manager sells a security a capital gains tax is triggered. To mitigate taxes, you can invest through your IRA or a 401(k) or by investing in a tax-sensitive fund. You should also be concerned with the fees. You will want to look for funds with the lowest amount of fees for the more money you pay out in fees the less money you will have available to invest.