7 types of mutual funds you need to understand
To invest wisely, you need to understand what you’re investing in. Most retirement plans allow you to invest in a variety of mutual fund-like options.
A mutual fund is an investment that lets people pool their money together into one professionally managed investment. Mutual funds can invest in stocks, bonds, cash, or a combination of those assets. To invest in a mutual fund, you buy shares of it. The fund’s manager will invest according to the fund’s goals, and can buy and sell the underlying investments, or holdings, as needed.
Before you invest, make sure you understand what each type of mutual fund is all about. In addition, before you invest in any specific mutual fund, you can learn more about it by reading its prospectus. Here are seven different kinds of mutual funds that you may see within your retirement plan.
1. Growth funds
Growth mutual funds invest primarily in stocks of companies that have the potential for above-average gains. Because of that, these funds can rise in price faster in a rising, or bull, market, but can also fall in price more rapidly in a falling, or bear, market. They are generally best suited for people who have a higher risk tolerance and don’t mind large swings in price.
2. Income funds
Income mutual funds invest primarily in stocks and bonds that pay dividends, so that investors continually have income coming in, regardless of the actual performance of the fund. These funds typically produce lower returns than growth funds, because their main goal is not to produce a higher price. That means, they also don’t fluctuate in value as much as a growth fund will.
3. Money market funds*
Money market mutual funds hold very short-term securities issued by the government or by corporations, such as U.S. Treasury bills or Certificates of Deposit. Since the risk of losing money is low, the annual return of a money market fund is also low — sometimes lower than the annual rate of inflation.
4. Balanced funds
These funds invest in a diversified combination of stocks, bonds, and cash equivalents, and seek both growth of capital and income over the long-term. They will typically produce lower returns than a growth fund, but higher returns than an income fund.
5. Index funds
These funds attempt to replicate the performance of an index, such as the S&P 500, by building a fund that owns every asset in the index or achieves the same results by holding similar securities. Because the funds simply track an index, there is no need for a fund manager to buy or sell stocks or bonds within them. That’s why these funds are typically considered passively managed, meaning they are not actively managed by a fund manager. That can cut down on the cost to the investor.
6. Asset allocation portfolios
These portfolios also hold a mix of different investment types — stocks, bonds, and cash investments. Professional investment managers tailor the mix of investments based on risk tolerance. The more aggressive the portfolio is, the more stocks it includes. The more conservative it is, the more bond (fixed income) investments it includes. As an investor, you would typically choose a fund with a similar label as your own risk tolerance.
For example, if you are an aggressive investor and don’t mind large swings in price, you may want to select an Aggressive Asset Allocation portfolio. Or, if you are more conservative in nature and can’t stand large market fluctuations, you may want to select a Conservative Asset Allocation portfolio.
7. Target-date funds
Target-date funds (also known as life-cycle or age-based funds) are designed to simplify investing for retirement. Generally, a participant chooses a fund with a target date closest to the year the participant expects to retire. Once the participant selects an appropriate fund, they don’t need to do anything else. The fund manager will manage the fund so that its holdings become more and more conservative the closer the fund date gets to its “retirement date”.
For example, if you choose a 2030 Target Date Fund, you will anticipate retiring in the year 2030. Therefore, the fund will invest more conservatively as the year 2030 approaches. These are popular options for participants who want to invest for retirement without having to re-allocate their assets as they get closer to their retirement date. Of course, an investment in a target date fund is not guaranteed at any time, including on or after the target date. Keep in mind that you will generally incur higher costs with the target date funds than if you were to invest directly in the underlying investments themselves.
Regardless of which type of fund or funds you choose, be sure to read the fund’s prospectus and fact sheet carefully before investing. The documents will tell you important information, like the fund’s objective and what fees you’ll pay for it.
**Asset allocation, diversification and rebalancing do not guarantee a profit or protection against loss.
Consider the investment objectives, risks, and charges and expenses of mutual funds. A prospectus containing this and other information about the investment company can be obtained from your financial professional or the company. Be sure to read the prospectus carefully before you invest or send any money.
Important Note: Equitable believes that education is a key step toward addressing your financial goals, and we’ve designed this material to serve simply as an informational and educational resource. Accordingly, this article does not offer or constitute investment advice and makes no direct or indirect recommendation of any particular product or of the appropriateness of any particular investment-related option. Investing involves risk, including loss of principal invested. Your needs, goals and circumstances are unique, and they require the individualized attention of your financial professional. But for now, take some time just to learn more.
This article is provided for your informational purposes only. Please be advised that this document is not intended as legal or tax advice. Accordingly, any tax information provided in this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent tax advisor.
Equitable Financial Life Insurance Company (New York, NY) issues life insurance and annuity products. Securities offered through Equitable Advisors, LLC, member FINRA, SIPC. Equitable Financial Life Insurance Company and Equitable Advisors are affiliated and do not provide tax or legal advice.