Build a Diversified Portfolio with Mutual Funds
By diversifying your investment portfolio among stocks, bonds and money market securities, you can lower your overall investment risk. Diversification can help even out price swings during the normal ups and downs of the stock market, although it cannot ensure against loss.
One way to diversify your portfolio is by investing in mutual funds. Mutual fund managers pool your money with the money of many investors to create a portfolio of investments. You'll need to review a mutual fund's objectives to see if it will help you reach your investment goals.
Stock Funds Can Add Portfolio Growth Potential
Investing in stocks lets you participate in the potential growth of individual companies and the economy in general. By investing in stock mutual funds, you benefit from professional portfolio management and eliminate the sometimes difficult process of choosing individual stocks.
It's important to remember that investment return and principal value will fluctuate, and it is possible to lose money by investing.
You can select stock funds based on a variety of characteristics.
Market capitalization represents the value of a company's outstanding shares of stock. In general:*
- Large-cap funds invest in companies valued at more than $12.2 billion.
- Mid-cap funds invest in companies valued at $4.2 billion to $12.2 billion.
- Small-cap funds invest in companies valued at less than $4.2 billion.
*Source of market capitalization ranges: Lipper, a Thomson Reuters Company, © 2013 Thomson Reuters. All rights reserved. Any copying, republication or redistribution of Lipper content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Lipper. Lipper shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon.
- Growth funds typically invest in fast-growing companies thought to have high-growth potential.
- Value funds usually invest in companies that may be fundamentally strong but whose stocks are thought to be undervalued.
- Index funds invest in companies to track a benchmark index, such as the S&P 500® Index. The indexes are not investment products available for purchase.
- Growth and income funds invest in a mix of stocks that pay dividends and those that do not.
- Asset allocation funds invest in a variable mix of stocks, bonds and money market securities. Some use a "fund-of-funds" structure and invest in other mutual funds rather than individual securities.
- International funds invest primarily in companies in developed markets, such as Europe or Japan.
- Global funds invest in the U.S., developed foreign markets and sometimes emerging markets.
- Emerging market funds generally invest in developing markets, such as Russia, South Korea or Mexico.
- Regional or single-country funds concentrate on a region, such as Latin America, or a specific country.
- Utilities, technology and other sector funds invest in stocks in the named industry.
- Real estate funds generally invest in real estate investment trusts that own or operate income-producing property, such as apartments and shopping centers.
Bond Funds Can Provide Your Portfolio Income and Stability
Bonds essentially are loans from you to issuers, such as governments, agencies or corporations. These entities agree to pay you back with interest within a certain time period.
Bond mutual funds pool many bonds into a single investment portfolio. Their prices generally fluctuate less than those of stock funds, so investing in bond funds can add a measure of stability to your portfolio. Generally, as interest rates rise, bond prices fall.
Key factors to consider with bond funds include the issuer, maturity and tax treatment.
- Private corporations issue corporate bonds to cover short-term expenses or finance long-term projects.
- State and local governments issue municipal bonds to finance public projects, such as road or bridge construction.
- The U.S. government issues Treasury bonds to help finance the national debt.
- U.S. government agencies issue bonds to fund projects or activities such as mortgage lending, economic development or flood control.
- Short-term bond funds typically invest in securities that mature in less than three years.
- Intermediate-term bond funds generally invest in securities that mature in three to 10 years.
- Long-term bond funds typically invest in securities that mature in more than 10 years.
- The income from a bond fund generally is subject to federal, state and local income taxes.
- The income from a tax-free bond fund, such as a municipal bond fund, generally is exempt from federal, and sometimes state and local, income taxes. It may be subject to the federal Alternative Minimum Tax. Capital gains in these funds are not exempt from taxes.
Money Market Funds Seek Portfolio Capital Preservation
Money market funds hold securities, such as U.S. Treasury bills, that mature in less than one year. These funds can be suitable if you need relatively easy access to cash because many offer check writing privileges. They can provide a higher return than bank Certificates of Deposit or savings accounts and can add stability to your portfolio. Keep in mind that there are fees for investing in a mutual fund.
An investment in the fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund.
Diversification does not assure a profit nor does it protect against loss of principal.
This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.