Mutual Funds- Minimize Your Risk

Mutual Funds: Minimize Your Risk While Building Your Wealth

If you're new to investing, are following a dollar cost averaging plan or are simply interested in minimizing your risk in the market, mutual funds may be your answer.

Simply speaking, a mutual fund is a group of diverse investments that includes stocks, bonds or money market instruments. When you invest in a mutual fund, you own a portion of those investments, and can make money either by receiving dividends and interest from your investment or by the rise in value of the securities.

Advantages of Mutual Funds

There are many reasons to consider investing in a mutual fund instead of individual stocks and bonds. The main reason is the diversity of mutual funds, which can increase your potential returns while decreasing your overall risk. When you invest in mutual funds, your money is spread across many different companies. Mutual funds are also a good choice for small investors, because the fees are relatively small compared to the fees for buying stocks and/or bonds individually. Mutual funds also have the advantage of being professionally managed, so they're ideal for investors who either don't have the time to research their own investments or who don't feel they have the experience to make their own investments. Liquidity (the ability to readily access your money) is another benefit of mutual funds. Funds can be sold on any business day at that day's closing price - or at the following day's close if the sell order is placed after the market closes.

Types of Mutual Funds

• Stock Funds - These funds mostly invest in the stock of publicly traded companies. They are also known as equity funds. There are numerous types of stock funds, including blend funds, small-cap, mid-cap and large-cap funds and growth funds.
• Bond Funds - Bond funds invest in bonds, which are also known as debt securities. Bond funds are usually safer than stock funds, but the returns are also lower.
• Municipal (or Muni) Bond Funds - These mutual funds invest in tax-exempt bonds that are issued by cities, states and other local governments. They provide tax-free income to their investors. Bond funds tend to go up in value when interest rates decline, and go down in value when interest rates rise.
• Balanced Funds - Balanced funds, also called hybrid funds, combine a mixture of stocks and bonds, and a small money-market investment into a single portfolio. This type of fund generally appeals to investors who are looking for a combination of low risk, income and modest capital appreciation.
• Money Market Funds - Money market funds invest in short-term, interest-bearing securities. They are usually less risky than either stock funds or bond funds and are designed to trade at a constant $1 a share. This type of fund is usually a short-term investment.
• Index Funds - Index funds can be either bond funds or stock funds. They invest in companies that make up a given index, such as the S&P 500 or the Nasdaq 100, and attempt to mimic the returns of that index. Index funds usually have lower costs than managed mutual funds because index funds do not need research analysts or money managers to pick their stocks.
• Sector Funds - These mutual funds invest in the stock of a specific industry sector, such as technology, health care, transportation or energy. Sector funds are usually much riskier than general equity funds, but they can also generate higher returns.
• Global & International Funds - Global funds invest in both foreign and domestic companies, while international funds invest only in companies based outside the U.S.

Remember, if you're new to investing, mutual funds provide you a low-risk investment option while still allowing you to enjoying the benefits of a professionally managed portfolio.