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One of the most popular ways to achieve your investment objectives is with mutual funds. Mutual funds are a great way to get started in investing and can continue to play an important role in your portfolio throughout your life. Here, the California Society of CPAs (www.calcpa.org) provides some basic information to help you understand how mutual funds work.
A mutual fund is a portfolio of stocks, bonds, or money market funds that is managed on behalf of many investors who share ownership. Each fund has an investment objective and a professional manager. With a mutual fund, investors can attain a diversified portfolio for much less than they could by buying individual stocks and bonds.
There are three major categories of mutual funds ‹ stock, bond, and money market. Each has a primary investment strategy.
The stock category includes many types of growth funds, which focus on stocks that show capital appreciation. Income funds are for investors whose primary objective is income, while balanced funds balance growth and income. Then there are sector funds, which invest in a particular sector such as technology or health care, and index funds that buy shares of every stock in a particular index, such as the S&P 500. With socially responsible funds, investors support those companies that best match their personal beliefs and values.
Global funds invest in companies both around the world and domestically. International funds buy only foreign securities while regional funds concentrate on markets in one part of the world such as Latin America or Europe.
There are also numerous types of bond funds. These range from the most conservative that invest primarily in government bonds to those that specialize in junk bonds.