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

Best Mutual Funds To Buy

best mutual fundsIn order to find the best mutual funds, you have to understand the basics first, so let's start by looking in a little more detail at what they are, and how you make ( or lose ) money with them. My analogy on the first page was very simple since it used the stock market as an example, purely because this is something we all know and understand (even if we have never traded or invested ourselves). We have at least heard of some of the companies quoted, and will be used to seeing them discussed in the news on a daily basis - companies such as Boeing, IBM, Microsoft, General Motors, McDonalds, American Express and Wal-Mart Stores - all of these blue chip companies are constituents of the DOW 30 Index, the principle US stock market index which provides a barometer on the performance of the broader financial markets. So, before we run away with the idea that mutual funds are purely based on stocks, let me say straight away, they are not - there are in fact three very different types of mutual funds, using very different financial assets, and all providing very different risk and reward profiles ( which we will also consider in detail ) . So to start, let's take a look at the three broad types of mutual funds, but as you will see later they can ( and do) overlap which can be confusing - don't worry I will explain as we go along! The three main types of mutual fund are stock funds, bond funds, and money market funds.

Best Mutual Funds To Buy - Stock Funds

So, let's start with the first of these, namely stock funds, and sometimes called equity funds. This is by far the largest sector of the market and as you would expect the funds invest in stocks - simple enough. Sadly, this is where the simplicity ends. Let's go back to our example of our co-workers setting up their fund. The fund manager may decide that he or she wants to invest in the companies in the DOW 30, or perhaps in a particular sector such as mining for example - perhaps smaller stocks might be considered as offering better returns, or speculative stocks in an overseas country. All of these and more would be considered stock funds, but each is very different in it's risk and reward profile which we will consider later. At this point all I would say is that a mutual fund of DOW 30 stocks would be less risky relative to a speculative group of stocks overseas, but as you will see there are many other factors to consider in choosing the best mutual funds.

Best Mutual Funds To Buy - Bond Funds

I think, ( well I hope so anyway ), that most of us understand stocks. Bonds are a different form of investment altogether. Let me give you a quick explanation of a bond. In simple terms it is an IOU. If you have ever borrowed money from someone at work, and then said "I'll pay you back tomorrow" then you have in fact issued a bond in return for money. Now in this simple example you would pay your friend back the same amount you had borrowed, but in the real world you would be charged interest on the loan. So bonds generate income based on the interest rates associated with the loan. All sorts of people issue bonds in return for money. The government issues bonds, companies issue bonds, the Treasury issues bonds - all have one thing in common - they all provide an income to the bond holder in the form of interest payments during the life of the bond. If you would like a more detailed explanation please follow the link to saving bonds. Now, as with stocks, this is where the simplicity ends!! There are many different types of bonds, all with different risk and reward profiles, which again you must understand in order to pick the best mutual funds. We will look at each of the main types shortly, but as a rule of thumb the higher the interest rate then the riskier the bond.

Best Mutual Funds To Buy - Money Market Funds

The final broad group is those mutual funds which invest in the money markets. These are probably the most complicated to understand for beginners, and often considered the least risky of all the mutual funds as an investment. However as we will see shortly, all risk is relative. As you would expect, money market funds are invested in the money markets - which means what exactly? I will try to explain. The most common form of investment for this type of mutual fund is something called a Treasury Bill or T-Bill. T-bills are issued by the Federal Government and like bonds are a way for the government to raise money. So you might be wondering, what is the difference in that case between a Treasury Bill and a bond - a good question. The answer is very simple and is defined by time. Treasury bills mature in less than a year, whereas bonds mature in anything up to 30 years. The key point to understand is that money market funds are defined by time, as they are not allowed to invest in anything that has a maturity longer than 397 days ( for practical purposes 13 months ). The investment rules are tightly controlled by the US SEC in order to ensure that risk is limited, of which this is one.

Now another odd term you will come across when looking at the best mutual money market funds is "commercial paper" - very odd! Again, all this means is a short term debt issued by corporations in order to raise finance. Short term in this case generally means 270 days ( or 9 months ) so if a bank wanted to raise some cash it could issue a commercial paper debt and then use the money raised to finance inventory or cash flow - they are not allowed to invest in plant or other fixed assets.

Finally you must not confuse money market funds with your local bank deposits as they are very different. One of the most important is that money market funds are not insured by the Federal Deposit Insurance Corporation or FDIC, whereas your bank deposits are - we will look at the risk profile of each type of fund shortly.

So, in summary, the above are the three broad groups for mutual funds. Now we will take a look at each group in turn to identify all the various combinations of mutual fund types that sit within each group, so that you can begin to identify the best mutual funds for your own investing requirements. Let's start by looking at stock funds in more detail.

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