What Are Mutual Funds?

Let’s cover them in more detail.

Stock Funds

Stock funds invest in shares of publicly-traded companies. Think Amazon (AMZN), Tesla (TSLA), and Microsoft (MSFT).

There are many different types of stock funds, such as:

  • Total-market funds track the entire stock market.
  • Large-capmid-cap, and small-cap funds track companies of different market caps.
  • Value funds track companies that are currently undervalued.
  • Growth funds track companies that have high growth potential.
  • Income funds pay regular dividends.
  • Real estate funds invest in publicly-traded real estate companies.

As you can see, this alone is a big topic. Dozens of strategies can come from investing in different types of stock funds.

However, if you invest in mutual funds with your employer, you are likely investing in funds that track most or all of the market, thus lowering risk.

Bond Funds

Bond, like James Bond? Unfortunately, Bond funds aren’t quite that exciting. Still, they can be useful for your portfolio.

Bonds are different from stocks, which give you a stake in the issuing company. Bonds, on the other hand, are a type of loan that the issuer agrees to pay on the maturity date - with interest.

Because bonds are a form of a loan rather than an ownership stake, you can invest in government bonds, for example.

Indeed, many popular bond funds are heavy on government bonds. This makes them a hedge against market volatility since governments have a very low risk of default.

With that lower risk usually comes lower returns on average, however.

Money Market Funds

Money-market funds have even less risk - and lower returns - than bonds. These funds only invest in high-quality, short-term investments from governments and US corporations.

Oftentimes, brokerage accounts will sweep any cash you don’t invest in a money market fund. For example, Fidelity uses its SPAXX fund for this purpose.

If you take a look at SPAXX, you will see that the fund invests mostly in US Treasury bills and U.S. government repurchase agreements. These are very low-risk investments.

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Disclaimer: Before you throw out all other financial advice you’ve been given and dedicate your life to following my advice, please be aware that I am not a financial expert. I have never ...

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