About 94 million Americans — 43.6% of U.S. households — owned mutual funds in 2016.1 What’s the appeal? It may be that mutual funds offer a convenient way to participate in a wide range of market activity that would be difficult for most investors to achieve by purchasing individual securities.
With more than 8,000 funds to choose from, you should be able to find appropriate investments to pursue your financial goals.2 The following overview describes some basic types of funds in rough order of risk, from lowest to highest. Investments seeking to achieve higher returns also carry an increased level of risk.
Money market funds invest in short-term debt investments such as commercial paper and CDs. They are typically used as a cash alternative and/or a fund for settling brokerage transactions. Money market funds are neither insured nor guaranteed by the FDIC or any other government agency. Although a money market fund attempts to maintain a stable $1 share price, you can lose money by investing in such a fund.
Income funds concentrate their portfolios on bonds, Treasury securities, and other income-oriented securities, and may also include stocks that have a history of paying high dividends. Bond funds are subject to the interest-rate, inflation, and credit risks associated with the underlying bonds in the fund. As interest rates rise, bond prices typically fall, which can adversely affect a bond fund’s performance. U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. Dividends are not guaranteed.
Balanced funds and growth and income funds include a mix of stocks and bonds and seek to combine moderate growth potential with modest income, typically from a combination of bond interest and stock dividends.
Growth funds invest in the stocks of companies that are considered to have a high potential for share-price appreciation but generally have a low emphasis on income. They are more volatile than income funds as well as some broad-based stock funds.
Global funds invest in a combination of domestic and foreign securities. International funds invest primarily in foreign stock and bond markets, sometimes in specific regions or countries. There are increased risks associated with international investing, including differences in financial reporting, currency exchange risk, economic and political risk unique to a specific country, and greater share price volatility.
Sector funds invest almost exclusively in a particular industry or sector of the economy. They may offer greater appreciation potential than broad-based stock funds during certain market cycles, but the risk level is higher.
Aggressive growth funds aim for maximum growth. They typically distribute little income, have very high growth potential, tend to be volatile, and are considered to be very high risk.
There are mutual funds covering almost every aspect of the stock and bond markets. All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful. Asset allocation and diversification do not guarantee a profit or protect against investment loss.
Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.