Retirement Plan

A mutual fund guide could basically be called a guide to investing in stocks, bonds, and money market securities. This is because about 99% of the time, if you own mutual funds your money will be invested in one or more of the above investments types. Funds are not just another investment option; they represent the best way for most people to invest in investment securities.

When I was a financial planner a prospective client once asked me, "should I invest in stocks, bonds, IRAs, or mutual funds?" That question told me a lot about the lawyer asking it. He needed a financial planner, and also needed access to a good basic guide to investing as well. I explained that mutual funds were the easiest way for the average investor to invest in stocks and bonds, and that this could be done in either an IRA and/or in various other types of accounts, like in a joint account with his spouse.

In this simple guide to investing we cover the four basic types of mutual funds, their financial objectives, and the cost of investing. All of these funds are simply professionally managed pools of investors' money. You invest a dollar amount, and in return own shares in a large portfolio of securities like stocks and bonds. The financial objectives range from safety and stability of principle, to high income, to high growth or profit potential.

Money market funds invest in safe short-term debt like U.S. Treasury bills, with safety and liquidity as the primary objectives. They pay competitive interest rates in the form of dividends, and the value of their shares is pegged at $1 and rarely fluctuates in value. Bond funds invest in bonds, longer-term debt, to produce higher interest income for the investors. The value of investor shares will fluctuate with changes in prevailing interest rates, so risk is moderate in bond funds.

Equity funds invest your money in common stocks with the objective of earning higher returns or profits for investors. Risk is higher here, as the price or value of shares can fluctuate significantly. The fourth category is balanced funds, which invest in a combination of money market securities, bonds, and stocks. The objective is to provide both moderate growth and dividend income at a moderate level of risk.