Unsurprisingly, as a financial adviser, one of the questions that I hear the most frequently with regard to mutual funds is, “Which one?” This is because there are so many mutual funds, from foreign funds to socially responsible funds. Therefore, any investor who wants to buy a mutual fund may be paralyzed by the variety of choices available.
Let’s take a look at some of them:
1. Growth funds – These tend to focus on stocks that may not pay a regular dividend but have the potential to generate large capital gains.
2. Income funds – As their name may suggest, these funds hold stocks that pay out a regular dividend.
3. Index funds – These follow the progress of a particular market index, such as Dow Jones or the S&P 500, and are invested in all or some of the companies that are on that particular index.
4. Sector funds – These specialize in a certain segment of an industry, and therefore these funds are invested in companies belonging to that specific sector.
So which of these is the best for you? Obviously, that is a very individual question as every investor is different. Before you make your decision, you need to take a look at your current circumstances as well as your life goals. What is your level of risk tolerance? How close are you to retirement? How much money do you have to invest? Also, be wary if you own more than one mutual fund that the contents of your mutual funds don’t overlap. If they do, owning the same stock(s) in several funds may negate your aim of diversification.
The best funds for you are the ones that are the most appropriate to your personal needs and conditions. To learn more about how to effectively use mutual funds in your portfolio, go to www.learnaboutinvestments.com.