In our previous lesson, we discussed the three major fund types (stocks, bonds, money markets) and what they consisted of, now we will drill down and talk about them in greater detail (as this lingo will be prevalent when you go to choose your plan).
Money markets (funds) are often used when you sell off your investments and the investment firm deposits your proceeds in an interest bearing account (versus sending you a check and you lose out on the interest, while you decide what to do with your money).
The major types of Bond funds include:
U.S. Government Bond Funds are U.S. treasury or government securities.
Municipal Bond Funds are tax-exempt bonds issued by state and local governments.
Corporate Bond Funds are the debt obligations of U.S. corporations.
Mortgage-Backed Securities Funds are securities representing residential mortgages. (from government lenders like Fannie Mae and Freddie Mac).
Stock funds are by far the most complicated of your fund options (in my case they make up 90% of my 401k portfolio). The investment firms have a number of ways they label their different stock funds, which are supposed to help you categorize the different strategies you can follow depending upon your risk tolerance. They are as follows:
Value Funds – The key here is the investment firm considers these stocks to be undervalued. Think of this fund like a real estate investor does when he finds a home that is way under priced, with a little polish, these suckers could make a ton of money. These funds invest in mid to larger sized companies. Stocks in this fund usually pay dividends (some companies pay cash back to their shareholders on an annual (or a variation of) basis in the form of cash and or additional shares based upon the money that they make (so, instead of the price of the stock going up, they opt to pay the shareholders now). These are considered typically safe investment (as there won’t be too much swing in prices).
Growth Funds – These funds invest in stocks that are thought to be the quickest growing companies in the market. Growth funds hardly ever provide dividend income because they are focused on expanding their businesses. These are considered risky investments with an investment horizon of 5-10 years (meaning you better plan to stick with these guys for that time to get the most out of the stocks).
Blend Funds – These funds are a mix or blend of both growth and value stocks. Below are the different types of blend funds by size:
Large-Cap Funds – These funds invest in companies whose value is greater than $5 billion dollars. These are usually companies that have been around for a long time and have a proven track record.
Mid-Cap Funds – These funds invest in companies whose value is greater than $1 billion, but less than $5 billion.
Small-Cap Funds – These funds invest in companies whose value is less than $1 billion. These companies, like the growth fund companies, reinvest profits to expand, versus raising additional money through other methods.
Index Funds – These funds are representative of different stock markets indexes, like Dow Jones, Standard and Poors, etc. Instead of hand picking stocks from different markets (there are thousands); the investment managers of this fund select portfolios built around the entire market. These are very cost efficient funds with this hands off approach to investing, however, they maybe risky too.
International Funds having been doing quite well as the dollar has plummeted.
Global Funds – invest in stocks around the world.
Foreign Funds – invest in stocks outside of the U.S.
Country Specific Funds – invest in one country or physical region of the world.
Emerging Markets Funds – invest in smaller, developing countries and are considered very risky, however very rewarding in some cases.
Sector Funds invest in different industries or segments of the market. Such as utilities or technologies or healthcare.
Now, keep in mind the above is the extreme basics, and there are multiple types of funds out there that could take me hours to discuss. The point here is, now you have an idea of what you are looking at, when you start to analyze your different 401k plan or investing options.
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