Mutual funds are an easy way to invest in a broad portfolio of stocks, bonds, and other securities. You don’t need to spend a lot of time picking individual stocks and making trades. Just invest in a mutual fund, and the mutual fund takes care of managing an investment portfolio for you.
There are thousands of mutual funds to choose from that contain different investment portfolios and fund features. Here are the most important types of mutual funds to consider to find the right ones for your portfolio.
Equity funds invest in stocks. You can choose an equity fund that specializes in certain types of stock investments, such as U.S. stock, international stock, growth stock, or value stock. Another variation is the size of companies that are targeted by the fund. Small-cap funds buy stock of smaller companies, mid-cap funds buy stock in midsize companies, and large-cap funds buy stock in large companies. Some equity funds specialize in stocks from specific sectors of the economy such as finance, energy, or health care.
Fixed income funds
Also known as bond funds, fixed income funds invest in debt issued by local and national governments and by large businesses. Bond funds are typically considered a lower risk alternative to stock investments, but offer less growth potential.
Balanced funds invest in a mix of stocks and bonds. Many investors want to capture the growth potential of stock investments and the lower-risk income from bonds. A balanced fund provides a simple way to cover both stock and bond investments in a single fund.
Index funds are designed to track a broader market such as the S&P 500. The main advantage of index funds over equity funds is that they typically have very low fund expenses since index funds require almost no management. (See also: Why Warren Buffett Says You Should Invest in Index Funds)
Target-date funds adjust their asset allocation mix over time, from more aggressive investments to more conservative choices as the target date approaches. These funds are usually named with a…