A mutual fund or exchange trade fund (ETF) is a type of investment that can provide access to a diversified, professionally managed portfolio. There are multiple types, each with different risk levels and potential returns. Let’s go through some investment fund categories and get the basic facts about each.
Money Market
A money market account plays it relatively safe by investing in low-risk, short-term instruments such as Treasury bills, municipal bonds or corporate bonds. They tend to deliver relatively low but stable returns at rates that are usually just a bit higher than a traditional savings account.
Index
An index fund is designed to follow the performance of a specific market index, such as the Dow Jones or the S&P 500. They have relatively low fees, since their strategy doesn’t require managers to do as much decision-making.
Income
These funds are meant to provide dividends at regular intervals, generating an income stream for investors. For this reason, they are popular among retirees. They can consist of a mix of bonds, dividend-paying stocks, Treasury bills, money market funds or other investments, depending on their specific strategy.
Growth
Growth funds comprise shares of companies that are considered to have high potential for growth. They can be in any industry, but technology companies and innovators in other sectors are common. They typically don’t pay regular dividends and may be subject to greater volatility.
Value
Value fund managers invest in stocks that they believe are currently undervalued, with the prospect of long-term growth. The managers may look for things like a low price to earnings (P/E) ratio or high dividend yields. Warren Buffett is one of the most well-known advocates of the value investing strategy.
Balanced
Balanced funds, as their name suggests, aim to minimize risk for investors by diversifying across stocks, bonds and other asset types. They require a relatively high level of involvement from the fund manager to adjust the allocations of different securities with changes they see in the market.
Target date
Target date funds are common in retirement plans because they help streamline decision-making for investors. Over the life of the investment, the portfolio manager will adjust the fund’s risk exposure as the investor nears their retirement or other target date.
Beyond the Basics
There are many complexities and nuances of each fund category beyond what’s covered here. A qualified Financial Professional can provide personalized advice on which funds might be right for you based on your individual circumstances and goals.
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