Which type of mutual funds should I invest in?

Mutual funds have become increasingly popular tools to enable individuals to invest. They have become particularly popular with those who have no experience of the stocks and shares market or those who only have a small amount of money to invest. However, mutual funds are often included in larger investment plans such as a 401k account. It is important to look at each type of mutual funds before making the decision of where to invest money. Bond mutual funds differ greatly from money market funds.

Mutual Funds Investment Types

There are different ways to categorize mutual funds. Perhaps one of the more useful is via the investment type. While we won´t cover every single type we will cover the major ones that in the market:

Stock Funds

Stock funds offer high profit potential, but this potential comes at the price of high risk. As you would imagine, a stock fund is made up of a diverse range of stocks and shares. These are particularly popular with new investors who want to find a sensible way to invest in stock market. Buying stock funds allows investors the opportunity to utilize a professional stock investor to invest their money for them.

There are thousands of different options when it comes to stock funds and this means more choice and decisions for the stock fund investor.

Index Funds And Actively Managed Funds

Index funds consist of a good cross section of stock from one particular index. This means there is little management involved and the performance of the fund is directly correlated with the performance of the index. Actively Managed Funds are fairly self explanatory. The investment manager is given the job of sourcing the most ideal stocks and shares to create a versatile diversified portfolio that performs well.

Dynamic Funds

There is another type of mutual funds we have yet to cover. Dynamic mutual funds are passively managed funds that compete with the benchmark they set themselves. This benchmark could, for example, stipulates that the fund needs to provide results equivalent to 200% of the daily performance of NASDAQ. The term passive can be slightly misleading because the investment or portfolio manager still follows the performance of the portfolio and acts according to the relative performance when compared to benchmark. However, he or she does not study and select individual stocks based on individual merit.

Growth Versus Value

Some funds have certain stipulations. For example, growth funds invest in companies that are still in the start up stage. Profits are used to expand the interests of the business. While dividends are rare with growth funds, the actual share price of the fund will increase rapidly. On the other hand, value funds look for value in companies which are often overlooked. Dividends are paid regularly by these companies.

Bond Funds

Bond funds on the other hand are made of various government and organization bonds. These are very low in risks but offer a steady stream of income over a long period of time. Bond mutual funds offer excellent liquidity, professional money management and much more. There is hardly any danger of the fund becoming worthless. Similarly the chances for losing money are also very less.

Money Market Funds

Money market funds are overlooked when compared with the stock and bond funds, however, they offer a lot to the investor for various reasons. Money market funds invest in debt instruments and not only provide a very good return but are incredibly flexible. Unusually, many money market funds provide investors with a checkbook, enabling them to write out a check. The money comes directly from their investment. With returns equivalent to double the interest rate offered by most banks, this is an excellent alternative to a savings account.

Load Or No Load Fund

There is some debate over whether loaded funds still have a place in the modern mutual funds market. It is difficult to see a reason for investors to opt for loaded funds at all. When we talk about the load in loaded funds we actually refer to the sales load or sales commission. This commission is paid to the third party that sold the fund.

The load can appear as a percentage of the initial investment. An annual percentage or a percentage of the final total. Percentages tend to be in the vicinity of 5% and bearing in mind that there are no load mutual funds with identical results and strategies available a 5% commission are different, increased profit is needed for a loaded fund to outperform a no load fund.

Choosing The Right Fund For You

There are so many mutual funds.. It can be a daunting task to find the one most appropriate to you. However, by considering which type of mutual funds you are most interested in, the field is instantly narrowed. Do some research on the Internet to find the best performing mutual fund and the ones you are interested in.

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