This isn’t something where you just pick one, because the fund you choose may not align with your style or personal goals. It’s important for you to understand the different types of mutual funds out there to make a better choice.
Here’s a quick guide to the types of funds available:
Blue chip – these funds invest in large, mature companies with high consumer recognition. These companies have high brand loyalty and are considered very safe. Blue chip companies include those such as General Mills, DuPont, and Coca-Cola. If an investor is looking for stability, this has it, but the returns might not be as good. Less risk usually means less reward.
Income - these funds hold stocks for their dividend yields. Income stocks typically have below-average growth potential. If you’re an investor looking to get a regular check (from the dividends, of course), you might want to consider an income fund. Income funds are usually geared towards retirees.
Growth – these funds hold stock in companies believed to have significant growth potential. Dividends won’t matter as much in this type of fund, because the focus is on appreciation. Market risk is the most prevalent risk factor for growth funds, but if you’re a younger investor who can ride out the volatility, it’s a pretty good portfolio to have. If you are interested in growth funds, you should also check out aggressive growth funds. Aggressive growth funds tend to be more volatile, but they can give more rewards if an investor holds them long-term.
Asset Allocation - if the market risk from growth/aggressive growth funds worries you, you should consider investing in an asset allocation fund. It works to reduce overall market risk by making sure you’re not overexposed in any one area. Here’s an example: let’s say you’re 50% stocks and 50% bonds, and stocks have huge gains this year, making them take up 60% of your portfolio. The fund would automatically re-allocate the gains from your stocks into your bonds, making the portfolio 50/50 again.
High-Yield Fixed Income – another fund for aggressive, long-term investors, this one holds corporate debt with low credit ratings, referred to as “junk bonds”. This is a good portfolio to have if you’re interested in income, but it focuses primarily on yield rather than safety.
Value – these funds invest in stock that’s deemed to be undervalued. They usually employ a “buy and hold” strategy, which means you have to stick with the fund to reap the big rewards. As a whole, these funds tend to under-perform during a general market advance, but they outperform in a decline. In other words, you might not make a killing, but you won’t get killed.
Tax exempt – these funds hold only municipal bonds and offer advantages for those in high tax brackets. If you’re a high income earner and want to ease some of your tax burden while still getting some appreciation, municipal bonds should be a part of your portfolio.