Investing in our retirement funds is no easy task. Somehow, we would probably need to at least get an idea on where we are investing our money.
There are a lot of investment assets available in the market nowadays such as bonds, cash equivalents, equity funds, stocks, etc.
Although investing in direct stocks may yield the greatest reward, it also comes with the greatest risk. Most of us may not know how to really invest in stocks and manage a portfolio because we may not have the time and the expertise to do so.
That is why the best option for most of us is to invest in mutual funds.
A mutual fund is a type of investment vehicle that pools the money of small investors to buy securities such as equity, bonds, etc. It is professionally manage so it is perfect for investors who do not have the time or expertise to manage a portfolio.
Most mutual funds are diversified, meaning they do not consist of shares of stocks of a few companies. Managers usually purchase stocks of multiple companies Â to spread out the risk such that losses of a few companies may be off-set by the gains of the better performing ones. In addition, with a mutual fund, the transaction costs is much lower than if you would be purchasing individual stocks yourself since you are able to take advantage of the volume discount.
Types of Mutual Fund Investment Options
- Small Caps – These are stocks issued by corporations with market capitalization generally of less than $1 billion. Small caps generally provide higher return on your investment because of the growth potential it offers. However, these stocks can be highly volatile and may have difficulty responding to the economic downturn.
- Mid-caps – These are stocks issued by corporations with market capitalization generally between $1 billion and $5 billion. These are less risky than the small caps because of higher capitalization. Mid caps normally receives less attention than small-caps and large caps.
- Large-caps – These are stocks issued by corporations with market capitalization of generally more than $5 billion. These are normally well established companies like Microsoft, Google, General Electric, AT&T, etc that are normally steadier than the small caps and mid caps. In addition, large caps companies pay steady dividends and can typically respond very well during the economic downturn
- International stocks – These are stocks issued by corporations outside of the United States. Generally, international stocks move in the opposite direction as the domestic stock. That’s why they tend to beÂ a good option for diversification for investors. Other factors affecting international stocks are fluctuations on the US dollar and the growth opportunities brought by emerging countries such as China, India, Brazil, etc.
Various types of mutual fund management objectives:
When you invest your money into a mutual fund, it goes with varying management objective:
- Growth Objective – Mutual fund managers usually target companies that are expected to generate higher-than-average earning growth over time and reinvest the gains back into the company instead of paying dividends to the shareholders.
- Value Objectives – Mutual fund managers would target companies who has strong potential for growth and earnings but are currently underappreciated by the market.
- Core Objective – Mutual fund managers target companies that would provide both the growth and value objectives.