First, let us define a Mutual fund; In a nutshell, a mutual fund is a collection of multiple stocks and bonds and other investments. Basically, an investment firm starts a fund by going out to the stock market and buying a bunch of different shares of companies and various different bonds or some combination thereof. They then sell shares of their funds to you through your company (and out on the stock market).
You start your job and your company tells you to join their 401k plan. For example, my company uses Vanguard (an investment firm), however, their are many more large investment firms used across the country like Fidelity and American Funds. Now, Vanguard has gone out and built a bunch of different funds that invest in very different things. For example, one fund might invest heavily in technology stocks (like Google, or Yahoo!), while another fund may be invested in international food markets, while another fund may be invested in utility companies.
You must decide it’s a great idea to join the company plan as you will defer a portion of your taxes and make free money. It’s not really a hard choice though, with automated deductions you’ll never know the money is gone.
You are then given a list you are supposed to choose from, of different funds. This is where it get’s tricky. What are the major types of funds? What funds should you buy? How to decide what funds are best? Should you choose the growth, value, index, bond, some other fund, or a combination thereof? Don’t worry, we’ll make some sense of this now.
The different major types of funds offered are Stocks, Bonds, and Money Market funds (Cash). Looks familiar huh? We talked about these in previous lessons.
Stock funds are wide and varied based upon economic sectors and geography.
Bond funds consist of various types of government, municipal, and corporate debt obligations (meaning they are additional ways for organizations to raise money for one reason or other.
Money Market funds invest in things mentioned in previous lessons, like CD’s offered by banks along with savings accounts. These are easily converted back to cash, however, they have a hard time keeping up with inflation (meaning the interest you are given for investing in them may be less than the dollars devaluation).
In the nest lessons, we will discuss in greater detail the different types of Bonds offered by your 401k.
But before that, our next lesson will discuss in greater detail the different types of mutual funds (load and no-load) and how you can save money (thus allowing you to invest more) by going with no-load funds. Mutual funds detailed discusses in depth the various types of funds offered by all mutual funds.
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