When you purchase shares in a mutual fund, your dollars are invested in a large number of shares of many companies all at once, and your investment risk is spread out over many stocks of many companies, not just one. With mutual funds, your risk could be less because you are more diversified.
Mutual funds make it easy for you to invest in stocks and bonds. The two main advantages of investing your money in mutual funds are: 1) You receive professional money management; and 2) you are able to truly diversify your holdings with a relatively small sum of money.
Each mutual fund has one or more fund managers who are skilled in the principles of money management. They normally have access to large databases of research.
Each fund also has a particular objective. That objective is defined in the fund's prospectus. The objective could be long-term growth, current income, or a combination of income and growth. For example, the objective of XYZ fund is long-term growth. To accomplish the fund's objective, the fund manager invests the money received from its shareholders by purchasing shares of many individual companies that, in his or her opinion, have the potential for growth over time. The manager may also leave a small portion of the fund in cash. Some stock mutual funds can own shares of stock from a few hundred companies, thereby limiting their holdings in any one company to no more than 5–6% of all the assets in the mutual fund. This is true diversification, and your risk is less than if you invested in just one or two individual stocks.
You do not need a lot of money to get started in a fund. Some funds let you start with very low minimums.
One good way to invest in mutual funds is to have money automatically deposited from your checking account into the fund. This gives you the benefits of dollar-cost averaging and also ensures that you stick to your investment program.
Cash and bond mutual funds are the most appropriate as your child gets closer to college age. The blended funds (stocks and bonds) and stock funds are most appropriate when college is years in the future and you have a long-term investment horizon.
Types Of Mutual Funds And Risk
Asset Class
Type of Fund
Risk
Other
Specialty Fund
Most Risk
International Stocks and Bonds
International Fund
Global Stocks and Bonds
Global Fund
Stocks
Aggressive Growth Fund
Growth Fund
Index Fund
Mostly Stocks
Growth and Income Fund
Equity-Income Fund
Stocks and Bonds
Asset Allocation Fund
Balanced Fund
Bonds
Corporate Bond Fund
Mortgage-Backed Bond Fund
Single State Tax Exempt Bond Fund
Municipal Bond Fund
U.S. Government Bond Fund
Cash
Money Market Fund
Least Risk
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