Mutual funds are a popular investment vehicle simply because they offer a number of features to suit the objectives of many types of investors.
Picture a collection of stocks, bonds, or other securities that are purchased by a group of investors and then managed by an investment company. That’s a mutual fund. When you buy a share in a fund, you’re really buying a piece of a large, diverse portfolio. Conversely, stocks are shares of a single company. When it comes to managing an investment, some investors prefer leaving those details and skills to someone else.
You should remember that past performance is no guarantee of future results. The value of your shares will fluctuate with the changes in market conditions, and when sold may be worth more or less than the original investment amount.
Mutual funds make managing your portfolio very easy. Periodic statements will fill you in on the performance of your mutual fund, transactions within your account, and more. You’ll also be kept informed about the taxability of your distributions.
When one security in a fund drops, an insightful fund manager may have included stocks that could cushion or offset that loss. Diversification is a big selling factor for mutual funds; there is, in fact, relative safety in numbers. But that’s not to say that an investor couldn’t diversify via his own stock selections. Remember that diversification cannot eliminate or guarantee against the risk of investment loss; it is a method used to help manage investment risk.
Growth and income funds attempt to achieve both long-term growth and current income. They invest primarily in high-yield common stock, preferred stock, and convertible debt (bonds) to generate both growth and income. Because they include a mix of investments, these funds are typically less risky than growth funds.
International and global mutual funds offer diversification into international stock markets. International funds invest only in foreign securities. Global funds, on the other hand, can invest in foreign and U.S. securities. The additional risks associated with investing on a worldwide basis include differences in regulation of financial data and reporting, currency exchange differences, as well as economic and political systems that may be different that those in the United States.
Asset allocation funds are those that give the manager great flexibility in deciding how to invest fund assets. The fund manager can typically invest in all the major investment classes, including stocks, bonds, and money market securities. The weightings of each class may vary dramatically and will reflect the market outlook and expectations of the fund manager.
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