Many people have heard of mutual funds. But even though they are often talked about as if they are all alike, nothing could be further from the truth. Mutual funds can be classified in all kinds of different ways, although there are several main kinds that can be noted to exist if you are a beginner. Here we will go through these types so you can delve into each of them in more detail.
If you are considering getting involved with stock funds you must remember they are better focused on for the long term. It would be unwise to assume you could get a good return over the course of a few months. We are all aware of stock market crashes that have occurred in the past. However, even with these crashes in mind, the overall trend for the value of stocks has still been on the rise.
One other point to remember is that this category of mutual funds is generally best if you are happy to take on a little more risk in the hope of gaining a bigger reward.
Those who feel more secure knowing they have a more reliable source of income will likely feel more confident investing in bond funds. Of course they come with risks, much like any other mutual fund, but they are greatly reduced when compared to the other types. One of the key risks is a potential rise in interest rates. This has the effect of reducing the value of the bonds, thus making them less successful.
As the name would suggest, these are normally a balanced mix of both stocks and bonds. This might be suitable for you if you want to invest in both types but you want to keep them together in one mutual fund. Obviously it makes sense to identify exactly which types of stocks and bonds go to make up any specific mutual fund before you invest. And remember, there will be a degree of risk involved so bear this in mind as well.
Money market funds
This type of mutual fund traditionally carries a far lower risk of loss than the kinds of funds mentioned above. However this is tempered by the fact that the returns are usually lower than the others as well. It is the classic case of less risk, less reward. The other kinds of mutual funds offer a higher degree of risk, but if that risk pays off you can expect a higher return as well.
Understanding the differences – and choosing the best mutual funds for you
Everyone will have their own ideas as to which type of mutual fund will be best for their financial needs. Risk appetite, expectations and finances will all play a part, but it is wise to understand what options there are and which type of mutual fund will be the best choice. Once you know the options you can make an informed choice.