Best Mutual Funds Explained
All you need to know about mutual funds, including the risks, rewards and terms  

Best Growth Mutual Funds

best mutual fundsIt goes without saying, but I'll say it anyway, if you don't know what your investment strategy is, then how can you look for the best mutual funds to meet your financial goals. Are you looking for a place to park some money short term, or a long term strategy. Perhaps you want long term capital growth for your future retirement and so are less concerned about an income from your investments. Alternatively perhaps you are looking for income rather than capital growth, or perhaps you want to try to balance both. You need to be very clear in your own mind what your investment strategy is, before you go to the market to research your mutual funds. Each of the different strategies will involve different levels of risk as every fund will offer different risk and reward profiles. So let's start by looking at the risk profiles for the various types of mutual funds.

Best Growth Mutual Funds - Risk Reward Profiles

Don't let anyone tell you that mutual fund investing is risk free - it isn't. All funds carry risk and therefore before you invest you must understand your own view of risk, but equally important is your own view of money and be honest with yourself. Just ask your self a simple question " if I lost $1000 tomorrow, how would I feel " - able to cope, distraught, unable to move on, devastated, angry, afraid, unable to sleep, unconcerned, - these are the sorts of questions you must ask your self - very simple I know, but they will at least give you some idea of your views and attitudes to money and investing. Make no mistake, you will at some point have to face the prospect of losing money, unless you are very, very lucky! Equally important is the % of your capital that you invest in the market at any one time. My own rule of thumb is generally no more than 10%-15%. So if you total net worth is $500,000 then your maximum exposure to the markets should be a maximum of around $50,000 to $75,000.

Now defining risk is almost impossible when we try to compare one mutual fund with another. Let me try to give you an example. Suppose we are comparing a low risk bond fund with a low risk stock fund. The former will provide lower returns with lower risk, but the latter has far more potential for higher returns, but with higher risks of loss, so the risk reward profiles for the two funds would be completely different although both might be classed as low risk. Now in order to provide a framework for you, I have grouped the three mutual funds into broad risk profiles, but please remember these are only a very rough guide. Within the prospectus you will also find a "risk-reward spectrum" which will also give you a guide and clues to the risk reward profile, so please study this for your fund, before investing.

Fund Type Risk Profile Of Fund Rewards Profile Of Fund
Money Market Funds These types of mutual funds are generally considered to offer the lowest forms of risk and  the greatest price stability of all three types. As we learnt earlier the NAV is controlled at $1 per share but if this falls then your capital will also fall. The biggest risk with money market funds is the erosion of your capital by inflation although in the recent sub prime crisis many banks were forced to support their money market funds, as any fall below the $1 value would have triggered a run on the funds with a catastrophic domino effect. So even with a "safe" investment such as  a money market fund there are always risks. The returns on money market funds are generally lower than on either stock or bond funds, as money is invested on short term rates only.
Bond Funds In the context of risk I would suggest that bond funds are a medium risk, although please bear in mind my earlier comments about risk. The reason they are higher than money market is simply that investment objectives are geared towards higher yields. Now bond funds can in themselves be high risk or low risk depending on the securities in the fund so as we saw when looking at bond funds, a corporate bond fund will have far less risk than a high yield fund. The main risks in bond funds are interest rates which may rise and your bonds fall, the risk of default and finally early settlement of the bond. Bonds typically experience more short term price swings. Two major factors affect the yields namely the quality and maturity of the bonds in the fund. As a rough rule of thumb the lower the quality and the longer the maturity, then the greater the risk and hence the higher the yield.
Stock Funds I have classified these as high risk although over the long term, stocks have outperformed both bonds and money markets in general. The key of course is the phrase "long term" . Typically in investing terms you would not invest in the stock market for anything less that 5 years - this irons out the short term fluctuations and price swings which occur daily in the markets. Again all risk is relative - a large cap fund compared with a micro cap fund are at opposite ends of the risk spectrum!! The major yield from stock funds comes from the capital gain in the value of the stocks themselves although blended or balanced funds try to achieve a balance of both. Some funds are structured for income, some purely for capital growth, and others which provide a mixture of both. Choosing the type of fund will depend on your investing objectives.

Now having tried to provide a rough framework for you of where bonds sit in terms of risk, let's now think about our investing goals in order to make sure we pick the best type of mutual funds to meet our goals.

Best Growth Mutual Funds - Investing Objectives

Now, whether you are investing for your future retirement, or are looking for additional income to support your existing lifestyle, then your investment decision will fall into one of the following broad categories :

One of the most important aspects of mutual fund investing is reading the first few paragraphs of the prospectus which will explain in detail the objective of the fund. This if you like is the starting point for your search for the best mutual fund, drilling down into the detail in order to find the best one for you, rather like an inverted pyramid. So if you are looking for growth of your capital, but are not concerned with income at this stage of your life then you would probably start by looking at stock funds, but remember the risks and you must take a long term view of the market. If you are perhaps looking for some income, but still require capital growth then a balanced fund might be more appropriate with a mixture of bonds and stocks whilst if pure income is your objective, then start by looking at bond funds. Finally if you have recently sold a significant asset and would like to invest for the short term, but with immediate access to your funds, then money market bonds will probably be the starting point for you.

So, in summary in looking for the best mutual funds, we start at the top of the pyramid with our investment objectives, and then start to drill down into the bond types and associated risks. Now let's look at some of the advantages and disadvantages of mutual fund investing and whether mutual funds are the best form of investment for you.

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