With thousands of mutual funds on the market, how can you choose the ones that are right for your individual needs?
For starters, you need to know the objective of each mutual fund. Let’s take a look at the investment objectives of some of the most popular types of mutual funds:
Growth funds — These funds invest in the stocks of growing companies, with the goal of providing investors with capital appreciation. In plain English, you invest in these funds for the potential to make your money grow.
If you invest in these funds, you will almost certainly experience the ups and downs of the market, but if you hold your funds long enough you may increase your investment’s potential return.
Growth-and-income funds — As its name suggests, a growth-and-income fund is structured to provide the potential for both growth in value and current income payments, in the form of dividends.
Generally speaking, these funds are less risky than growth funds, yet offer lower growth potential. Keep in mind, though, that dividends can be increased, decreased or eliminated at any time without notice.
International funds — You can choose from several types of international funds: global funds, which invest in both U.S. and international stocks; international funds, which invest primarily outside the U.S.; country specific funds, which focus on one country or region; and emerging market funds, which concentrate on small, developing countries.
These funds generally invest for growth, but they involve special types of risk, such as currency fluctuations and the prospect of investments being affected by political or economic turmoil.
Bond funds — When you invest in a bond fund, you are seeking current income, in the form of interest payments, and the chance to help stabilize a portfolio that might be heavily weighted toward stocks. You can choose from funds containing municipal bonds, corporate bonds, mortgage-backed securities or U.S. government bonds.
Although bonds funds generally contain less investment risk than stock funds, they carry a different type of risk: purchasing power risk. In other words, the interest payments you receive from your bond funds may not always keep up with inflation. Be aware that bond funds are subject to interest-rate risk and fund values may decline as interest rates rise.
While these types of funds have some obvious differences, they also share some important traits in common.
Mutual funds, by owning many different types of securities, offer the advantage of diversification. A financial adviser can help you choose those mutual funds that may be appropriate for your needs.
But it’s still your responsibility to know about the funds in which you invest, so before writing a check, read a fund’s prospectus, which can be obtained from your financial adviser.
The prospectus contains complete information about the fund, including its investment objectives, risks, charges and expenses, all of which you should consider carefully.
Ultimately, the best investors are usually the best-informed investors.
Ross Hage is a licensed financial adviser with Edward Jones. For more information, call (928) 468-2281.