The idea of making money and investing sounds great, but where do you start? After all, the average person knows very little about stocks, shares, or mutual funds.
In a nut shell, mutual funds are simply the everyday person’s vehicle into the stock market. Instead of choosing stocks from the London Stock Exchange yourself, you simply allow a trained investor to put your money into mutual funds; a shared fund; where trained professional managers choose stock based upon history, trends, and their knowledge. No one person can tell you exactly what mutual funds are best for your personal financial situation; because only you know what investment objectives you seek. Therefore, as the keeper of your future, you need to know a little about the varying types of mutual funds and what they can and can’t do for you.
The first and yet sad truth behind any investment, even mutual funds, all are potentially risky- just some more than others. And just like any gamble, the more risk you’re willing to take, the larger your return may be. For those wishing to invest with little risk; there are mutual fund options for you, as well.
Depending upon your investment objective is it risky or not, there are basically three types of mutual funds. Each type has sub-classes that differentiate even more based upon risk. The majority of mutual funds lie in the riskiest of all classes, the equity funds market or the stock market. These equity funds are then broke down into sub-classes based upon value and growth. Aggressive growth funds are investments made in small to mid-size companies; they offer the potential for great growth; but have little value. These aggressive growth funds can earn you big money; but they’re risky. For those wishing to invest in larger, more well-known companies; you may want to try your hand at growth funds. These funds offer you less risk but less growth potential; and ultimately less investment return. To even complicate the matter more, you can choose equity funds based upon location, as well. Global and International funds, as well as, sector and regional funds are all risky investments that may or may not pay off.
Another type of mutual fund that many choose to invest in is referred to as bond or fixed income funds. Income funds offer investors an on-going income potential; hence the name. Generally speaking, the return is smaller than returns on equity funds; but larger than the return on certificates of deposits or CD’s and other money market investments. However, they can be a risk especially if the interest rates set forth by the Federal Reserve go up.
The final type of mutual funds available to those wishing to invest is known as money market funds. Money Market funds are the safest of all mutual funds; however, they do offer little return. Money market funds invest in the dollar or paper money; treasury bills, and certificates of deposit; even on the International market; you may invest in money market funds; risks include foreign currency fluctuations.
Prior to putting your money into any mutual fund; it’s important to translate your overall goal for your financial future to your financial planner. It’s important to discuss risk and results; many financial planners may recommend diversifying your portfolio with both high and low risk mutual funds. Although, ultimately that is your decision; you should ask yourself if you’re willing to part with your principle; your age and current financial situation should weigh in on this discussion.
