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Investing with Mutual Funds
American Investors are increasingly turning to mutual funds to save their money.Mutual funds can provide a great way to invest for such things as retirement.They can also help you reach some big financial goals.They offer many advantages to all types of investors but you have to know what you're getting into if you are going to get the most out of your investment.Investing with mutual funds doesn't have to be complicated if you know what you're looking for and what you want out of your investment.Let's take a look at what mutual funds are and some of the different types of mutual fund investments.
What are mutual funds?
A mutual fund is a company that pools money from various investors and then invests that money into stocks, bonds, and other security assets.Mutual Funds are usually invested into a combination of different investment types.
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Different types of Mutual Funds
Mutual Funds fall into three main categories:
1. Money Market Funds
2. Bond Funds
3. Stock Funds
Each type of fund has different features and different risk levels.Generally speaking, the higher the risk, the higher the potential return on your investment; and vise versa.
Money Market Funds
Money market funds are probably the lowest risk fund available; compared to other mutual funds.You are only allowed to invest in certain high quality, short term investments issued by the government (corporations, and state and local governments).Money market funds will usually keep their NAV at $1.00 per share unless the fund performs poorly at which then the NAV will fall below $1.00.It is rare to lose with these types of investments, but it is possible.The biggest concern for investors with money market funds is the inflation risk.Inflation risk is the risk that inflation will outpace investment returns.
Bond Funds
Bond funds are generally riskier than money market funds because they are aimed to produce a great return.Bond funds are not restricted to the SEC's rules and can vary greatly in their risks and rewards.Some of those risks include:
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- Interest rate risk- the risk of having the market value of the bonds goes down when the interest rates go up.
- - Credit Risk- There is always the possibility that a company whose bonds are owned by the fund will fail to pay their debts.
- - Prepayment Risk- There is always a chance that a bond will be paid off early and then the possibility of not reinvesting the proceeds is an issue.
Stock Funds
Although stock funds have been known to rise and fall over a short period of time, they generally do better over a long term investment time.Stock prices can fluctuate from the very low to extremely high and for investors these types of mutual funds have the greatest risk involved.
So how is it exactly that by investing with these different types of mutual funds that you can earn money?That's a great question to which there are three possible answers:
1. Dividend payments- A fund can earn income in the form of a dividend from its portfolio.It then pays the shareholders almost all of the income earned.
2. Capital Gains Distributions- When a fund sells a security that has gone up in price the fund has capital gain.
3. Increased NAV- If the market value of the portfolio increases then the value of the NAV also will increase.
Now that you are more knowledgeable about what mutual funds are and know a little more about the different types you can look more seriously into investing with mutual funds.
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