Understanding Mutual Funds

Mutual funds can seem complicated, but they’re actually just professionally managed investment funds that pool money from investors to purchase other securities. These securities can be stocks, bonds, and other assets.

Here’s a helpful list of common types of mutual funds.

Balanced Funds

These funds, sometimes called asset allocation funds, invest in both stocks and bonds (and sometimes other types of assets). The goal of these funds is to reduce the effects of market volatility (fluctuations in value) by investing in different asset classes that have low or no correlation with one another.

Target Date Funds

Like balanced funds, these funds invest in both stocks and bonds. However, target date funds create a mix of stocks, bonds and other asset classes that adjust over time, becoming more conservative as an investor nears retirement.

Growth Funds

The main goal of these funds is capital appreciation – in other words, an increase in the price of the stock. Rather than paying dividends, the companies in these funds typically reinvest their earnings for expansion, research or development.

Aggressive Growth Funds

These funds are often chosen by investors with maximum capital gains as their objective. Aggressive growth funds invest in growing companies that have the potential to produce large gains. Because the companies are often start-ups or from new industries, there is more investment risk and price volatility.

Growth and Income Funds

The goal of these funds is to grow the principal, but still generate some income by investing in earnings in growth-oriented companies. They invest in earnings growth-oriented companies, as well as companies that pay dividends.

Fund of Funds

These funds invest in other mutual funds. Just as a mutual fund invests in a number of different securities, a fund of funds holds shares of many different mutual funds. Generally, these funds are designed to achieve even greater diversification than traditional mutual funds. Each of the funds that make up a fund of funds has expenses, so be aware that total expenses can be as much as it would be if you invested in a number of different funds.

Index Funds

These funds invest in securities that make up a market index. For example, an index fund based on the Standard and Poor's 500 would invest in all or a representative sampling of the stocks that make up that index. Because securities in an index fund's portfolio rarely change, management costs are generally lower than those of actively managed funds.

Value Funds

These are mutual funds that invest in companies which the portfolio manager determines are underpriced by fundamental measures. Assuming that a company's share price will not remain undervalued indefinitely, the fund looks to make money by buying before the expected upturn.