In these funds, investors pool their money together to have greater purchasing power. They are usually composed of stocks or bonds chosen by professional managers. The investor is paid a dividend for the amount and time the money is invested depending on the funds performance, similar to stocks. Some of the benefits include:
- Diversity—since there are anywhere from 25-5000 companies in a stock fund, it offers diversity which minimizes risk. To lose money, the overall value of the stocks would need to diminish which isn't very common in established funds.
- Reduced fees—large scale purchases don't charge commission
- Liquid cash—similar to selling stocks, investors can put their order in and sell at the end of day, then a check will be written or money transferred to their account
- No transaction fees—since the individuals are not buying each stock or bond, rather the fund managers purchase and sell when they deem necessary, there are no fees to pay for transactions
Types of Funds
Money Market
The most common money market funds:
- US Treasury
- US government and agency
- Municipal
- Local municipal
- Socially responsible
Some people choose to invest only in US backed money markets, while others enjoy the tax free earnings of the municipal funds. These funds usually invest in the "money markets", which loan and borrow money much like a bank.
Money market accounts are common bank accounts that invest in money market funds. Since they are safer and sometimes FDIC insured, they have a lower return rate. They are easily accessible as the bank offers these accounts, reducing the time and money spent opening an account with a broker or mutual fund company.
Bond
Governments and large corporations issue bonds to raise money. Buying a bond assures the investor the principal plus interest. They are a relatively safe investment, though inflation diminishes the worth of the principal of many bonds. Common bond funds include:
- Municipal Bond Funds
- Corporate Bond Funds
- Mortgage-Backed Securities Funds
- U.S. Government
Short-term, intermediate-term, and long-term refer to the maturity of the bonds.
Stock
Stock (or equity) funds are classified by two factors. The first is by strategy:
- Growth Funds – risky investments, without dividend payments, focused on quick growth.
- Value Funds – provide dividends from stocks belonging to undervalued mid to large companies
- Blend Funds – a mix between growth and value
The second classification is by size: large-, mid-, and small-cap, referring to the market value of the company.
Index
These funds try to imitate an index, like NASDAQ or S&P 500, that represent a sector of business, such as technology. The portfolios are built by purchasing a small sampling of most company's stocks in that sector. Though the stocks aren't always selected by sector, sometimes they are created by regions (US, emerging, foreign, or global).
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