Funds Explained: Finding a Type to Suit You

With over 8,000 mutual funds on the market today, knowing which one best suits your investment goals can be tricky. A portfolio manager will be able to guide you in your decision-making, but it still helps to have some comprehension of these concepts yourself.

In order to identify the best fund for you, you’ll require an understanding of a number of different deciding factors, such as your financial needs, investment objectives, and risk tolerance, and the type of fund that will most satisfactorily complement these.

Read on to find out more about mutual funds and gain the knowledge that you need.

Money Market Funds

Money market funds work by investing capital in short-term debt instruments, typically lasting one year or less. As an investor, you may withdraw your money at any time, which makes them a relatively low-risk venture. They tend to be used to diversify portfolios that require the safety of the principal. Short-term interest rates will affect the rate of return, but the goal of most funds will be to maintain a net asset value of around $1 per share.

Bond Funds

Bond funds function by only investing in bonds. As a result, the aim of most of those who choose to invest in them is to secure a current income alongside preserving their existing capital. Due to their structure, they run the same risks as investing in individual bonds.

There are three main types for UK buyers to choose from, each of them split according to the type of bonds they invest in:

Government Bond Funds

Government bond funds offer the greatest level of credit safety out of the three different options and provide those who invest in them with a source of current income. Although they pose a relatively low credit risk, however, they are still sensitive to interest-rate fluctuations.

Corporate Bond Funds

As you might expect, this type of fund invests in bonds issued by corporations. Those looking for a higher return on their capital usually consider this option preferable to government bond funds.

High-Yield Bond Funds

This type of fund can be a little harder to understand. They work by investing in bonds that have been rated as below investment grade, also known as junk bonds. Although high-yield bond funds can provide a higher return than their counterparts, they also run the greatest credit risk. They tend to do best when the economy is experiencing an upturn, as the risk of default for the companies invested in decreases during these periods.

Balanced Funds

The third type of mutual fund is known as a balanced fund, and it works by splitting assets between bonds and stocks.  This option tends to be less volatile than alternatives that invest in stocks alone. The main aim of the portfolio manager and individual investors is usually to even out market advances and declines.

If you’re looking to invest, which type of mutual fund would be best suited to your investment goals?