What are mutual funds?
Mutual funds are pools of securities, which typically offer diversification within one or more asset classes to spread the risk. Mutual funds are run by professionals, who oversee the funds on behalf of shareholders.
In general, people invest in mutual funds in order to achieve diversification without the complexity of managing a large number of stocks and bonds. By their very nature, mutual funds can offer diversification that may help reduce risk while potentially increasing the overall return potential of the investment. The idea is that if one security held by a mutual fund loses value, another security may rise in value, offsetting the loss. While there is no guarantee, diversification is a strategy to help manage risk in a portfolio.
There are many types of stock funds, including:
- Growth funds, which primarily invest in companies whose earnings are the market projects to increase faster than the overall market.
- Value funds, which typically focus on stocks that the portfolio manager believes are selling for less than they are worth.
Funds are also categorized by their market value, known as capitalization (the price of a share multiplied by the number of shares outstanding). Common categories include small-cap, mid-cap, and large-cap.
Bond funds invest in bonds issued by government agencies and corporations. Unlike direct bond investments, these funds do not mature, so your principal will not be repaid unless you sell your fund holdings. They also do not offer guaranteed interest payments. Bond funds may lose value if interest rates rise, but in general they are less risky than many types of stock funds.
Ultimately, you'll want to choose a mutual fund (or funds) with the potential to complement your financial goals, risk tolerance, and time horizon. The longer your money will stay invested, the more opportunity you will have to ride out periods of volatility. Generally, the closer you come to the time when you will need the money, the less risk you will want to take.
Mutual funds are subject to fluctuation in value and market risk including loss of principal.
Saving and investing basics
Please consider the charges, risks, expenses and investment objectives carefully before purchasing a mutual fund or exchange-traded fund. For a prospectus containing this and other information, please contact a financial professional. Read it carefully before you invest or send money.