Mutual Fund Types
If you are considering purchasing mutual funds or trying to decide how to allocate your 401(k), you may be wondering about the different types of mutual funds. It can be confusing to choose how to distribute your money if you do not understand the difference between the four funds and how they can help you accumulate wealth.
Once you understand the difference in the types of funds, you still need to look carefully at the particular fund you choose. You should compare long-term growth, the rate of return, and the fees associated with each fund. It's important to realize that mutual fund is not the same thing as a 401(k). A mutual fund is an investment tool that may be part of your overall investment portfolio, and many 401(k)s invest in mutual funds.
Read on for our breakdown of the four types of mutual funds and the benefits and drawbacks of each.
A growth fund is a fund that buys stock in companies that are increasing rapidly in value. These funds will then sell the stocks at a profit. The risks with growth funds are much higher than other funds because they buy stocks in companies that newer or riskier.
These funds have higher fees because the stocks are sold more often. These funds are more aggressive, and as a result, the growth is the greatest over long periods of time. However, this also means that there is a greater risk. If you are risk-averse, you may want to consider a different type of mutual fund.
A value fund is a fund that buys stocks when they are undervalued and holds onto them as they grow. This is not a fund where they sell stocks as often. The stocks they purchase usually have good dividends, which is one of the ways that they make money.
The fees associated with this account are lower because they hold onto the stocks for a longer period of time. The risks associated with this are much lower. Value funds are considered to be a conservative investment.
An index fund is a fund that tries to match the growth of the various indexes, such as the NASDAQ or the S&P 500. Index funds are passively managed.
These funds work in two different ways: Some of the mutual funds hold stocks from all of the companies listed over the index, while others pick and choose a few stocks over the wide spectrum. The fees on these are generally the lowest since the companies do not often sell the stocks.
A blend fund is a mutual fund that includes a mix of value and growth stocks. Also known as hybrid funds, blend funds are more diversified.
This means the risk is more spread out, but it can also limit the fund's growth potential. It is important that you choose a fund with a good performance record, in order to make the best investment possible.
Choosing the Best Type of Funds for Your Investments
When you are trying to decide on what type of mutual fund to invest in, keep in mind that the key to being successful in the stock market is to have a diversified portfolio.
And although you may start with one type of fund, you may branch out to others over time as your needs and financial situation changes.
Remember, if you are totally lost when it comes to deciding on a mutual fund, or just how to invest in general, consult with a financial advisor who will be able to explain the ins and outs of investing.
Updated by Rachel Morgan Cautero.