You already know that mutual funds are an excellent way to save for retirement. Not only do they limit risk by spreading your money around known as diversification, but they also give you the comfort of knowing a professional money manager is keeping tabs on your savings. With liquidate inventory one can invest their fund in many ways which are describe below.
But with so many different funds available, picking the right ones for you can be daunting. What’s the difference between growth and value, fixed-income, and equity? This primer will break down the different types of mutual funds.
Generally, there are two types of funds, those that invest in stocks called “equity” funds and those that invest in bonds, known as “fixed-income” funds.
The vast majority of mutual funds fall into this category. Their investment style can generally classify them and the size of the companies they invest in.
With growth funds, managers are trying to find companies that have a history or perhaps the potential of strong growth in factors such as profits, sales, and cash flow. If those indicators continue to grow, so should the stock’s price.
In value funds, managers try to find companies that have strong financials already, but which have fallen out of favor with most investors.
Now that you know growth from value, all you have to do is add in the size of the companies a mutual fund invests in, its market cap, to understand how that fund works. For instance, a small-cap growth fund is going to invest in smaller, and perhaps younger, companies whose financial indicators have had healthy growth. A large-cap value fund, on the other hand, will look for big, reliable companies that are doing well financially but aren’t popular with the market.
If you’re comfortable matching the performance of the overall market, whether it goes up or down, an index fund might be for you. These funds invest in all the stocks that make up benchmarks.
Unlike equity funds, fixed-income funds invest in bonds, which are a form of debt. Companies and governments sell bonds to raise money for their own operating or investing needs. For instance, the U.S. Treasury’s 10-year bond is an ongoing program that perpetually raises cash for government coffers.
In general, because they’re backed by a promise to be repaid, bonds are viewed as more conservative than stocks. Since bonds typically pay out interest, they also generate income for investors. But their returns are usually smaller than what you’ll get with shares. Fixed-income mutual funds invest in a wide array and style of bonds, whether issued by the company’s corporate bonds or country’s government bonds.
Blended funds, which hold both stocks and bonds, aim for a higher return than straight fixed income, but still aren’t as aggressive as pure equity funds.
Now that you know what funds are made of, you’re that much closer to choosing the right fund for you.