One of the most common investments for small and individual investors is mutual funds. This is because they allows easy access by having small minimum initial investments and easy-to-understand concepts. An investor can open a mutual fund account for as little as $2,000 or in some mutual funds $50 per month with direct deposit. Mutual funds also allow investors to benefit from diversification while still participating in higher risk sectors like technology. The following are three types of mutual funds each with different goals targeting specific investor groups.
A long-term growth mutual fund focuses on blue-chip and large cap stocks with consistent earnings and predictable annual revenue increases. These mutual funds grow slowly and very much represent the tortoise when reaching the finish line. Investors with long-term investing horizons who are looking to hold onto mutual fund shares 15 years or more can benefit greatly from this type of investment. Due to their consistent growth, they also tend to have less drastic swings which can worry some investors who have a high risk aversion. Long-term growth mutual funds often own shares in large companies who have not transitioned to paying a large dividend, although they still may pay a nominal dividend to attract investors.
For younger investors or people with a high risk tolerance, aggressive growth mutual funds may provide greater returns in a shorter period of time. These types of mutual funds focus on sectors such as technology and pharmaceuticals which are experiencing rapid growth but could also have the bottom fall out in a market downturn. They usually have better performance over the long run due to faster growth rates but often scare off investors who worry about preserving capital. Aggressive growth mutual funds almost always have zero capital gains distributions. A mutual fund is required to distribute capital gains at the end of every fiscal year. However, this type of mutual fund often owns shares in companies which do not pay a dividend.
For retirees or individuals looking to receive dividends and capital gains periodically, growth and income mutual funds fit that criteria. Many small investors, when they retire, will shift their investments from aggressive growth mutual funds or individual shares of stock into growth and income style investments. If interest rates are low or decreasing they may purchase a bond mutual fund. If they still like stocks then they may purchase a mutual fund which owns shares of high dividend yielding companies. There are many multinational companies who grow slowly but also pay an annual dividend of 5% or more which can provide significant additional income.
When selecting a mutual fund the focus should be picking an investment which reflects your goals and principles. Aspects to consider is risk aversion, capital preservation and overall annual growth rate. It would be appropriate for young investor to invest in aggressive growth mutual funds while a retiree might be better served sticking with growth and income to cover expenses. This is only basic information however and it is highly recommended that anyone seeking investment advice speak with a certified financial planner or other investment professional about the advantages of investing in mutual funds.
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