Most mutual funds are classified into one of four types: money market funds, bond funds, stock funds, and target date funds. Each type has unique characteristics, risks, and rewards.
Money market funds are relatively low risk investments. They are only permitted by law to invest in certain high-quality, short-term investments issued by US corporations and federal, state, and local governments.
Bond funds carry higher risks than money market funds because they seek higher returns. Bond funds’ risks and rewards can vary dramatically due to the many different types of bonds.
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Stock funds make investments in corporate stocks. Stock funds are not all the same. Here are some examples:
- Growth funds invest in stocks that do not pay a regular dividend but have the potential to generate above-average financial returns.
- Income funds invest in stocks that pay out consistent dividends.
- Index funds follow a specific market index, such as the S&P 500 Index.
- Sector funds focus on a specific industry segment.
- Target date funds invest in a variety of stocks, bonds, and other assets. The mix gradually shifts over time in accordance with the fund’s strategy. Target date funds, also known as lifecycle funds, are designed for people who want to retire at a specific date.