Fund Classifications
Date Added: October 2001
By Chris Stallman
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When
I first got started in investing, I heard somewhere that there were
about 10,000 mutual funds but I didn't really believe it until
I started researching them. That's when I realized that whoever
told me that was correct.
Mutual
funds are a lot like humans: there's a lot of them and no two
are alike. Each has its own unique size, shape, color, and preferences.
To any new investor, it can prove to be a daunting task to find
the one fund that is best for them. It's this very reason that
we've decided to demystify some of the different fund classifications.
Stock Funds
Stock
funds are probably the most common funds out there. These mutual
funds invest a majority of their assets into common stocks. The
fund might have a specific group of stocks that they look for (i.e.
small-cap, mid-cap, or large-cap). These funds are typically best
for moderate investors with a mid to long-term outlook.
Bond Funds
These are another
popular type of mutual fund that invests in bonds. Rather than owning
parts of many different companies, they invest in the debts of companies
or the government and earn an interest that is paid out to the investors.
These types of funds are good for conservative investors with a
shorter time horizon.
Balanced Funds
A balanced fund
is a combination of a stock fund and a bond fund. In order to reduce
risk, the fund diversifies itself by buying a number of different
stocks and bonds. This keeps the fund from dropping considerably
in a down market. Unfortunately, it also doesn't appreciate
as quickly in an up market. These funds are best for conservative
or moderate investors with any time horizon.
International Funds
The US is just
one of the many markets in the world. In order to open up the international
markets to the average investor, international funds were created.
By investing in an international fund, you can invest in stocks
or bonds from other countries. Many small countries may be growing
quickly and an investment in them could prove profitable but there
are a number of added risks such as currency fluctuations and political
turmoil. These funds are best for moderately aggressive investors
with long time horizons.
Sector Funds
As their name
suggests, sector funds invest in one specific sector of the market.
For example, communications funds would invest in telecommunications
and information companies. Investing in sector funds allows you
to target one specific sector in order to maximize your return.
But keep in mind that the risks are greater when you do this. These
funds are best for aggressive investors.
Green and Quant Funds
Two less-popular
types of funds are green and quant funds. Green funds are funds
that invest in companies that are working to improve the world rather
than those that are harming it. Quant funds are funds that rely
heavily on mathematics to determine what stocks to buy. Historically,
neither have performed extraordinarily but they might be a good
way to diversify your portfolio. They're best for moderate investors.
Now that you have a little understanding of the different
classifications, it might be easier for you to decide which fund
to invest in. If you're still a little unsure, feel free to
drop us a line.
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