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

Best Mutual Fund - Stock Funds

best mutual fundsNow as I said on the first page of the site, there are over 8,500 mutual funds available in the market today, so trying to categorise them in order to find the best mutual funds is extremely difficult - however I will try my best to group them into broad types, which I hope will help you to identify these for yourself once you start to select your own mutual funds. However, do bear in mind that mutual fund providers will try to differentiate their products from their competitors by mixing market investments and risk profiles, so it can be very confusing, when you first start analysing the market. In addition some of the names can be deliberately misleading, so you will need to do your research carefully. What I have tried to do here is to provide some broad groups which I feel best describe the underlying investments, but I'm sure you will find others that I have not mentioned, so apologies in advance if this is the case. However I hope that from my descriptions you will at least be able to ask the mutual fund provider some detailed questions which will give you the information you need in order to identify the assets more accurately ( fingers crossed!). Below are my seven broad groups of stock funds as follows:

Best Mutual Funds - Growth Funds

As the name suggest, the managers of these funds are looking for growth, so the companies they look to invest in are growing fast, turnover rising quickly and supported by recruitment. Typically they will tend to be relatively new companies with an entrepreneurial management style and operating in niche markets - internet companies would be a good example such as Amazon and Last Minute, but please remember the dot com boom. Dell and Microsoft would be two other examples in their early days, as would Google itself. These stocks can rocket fast, but equally they are likely to fall even faster, so this group of mutual funds tends to have the highest risk. The focus with these types of companies is on earnings, not on dividends, and indeed some may not be making any profit at all. In a rising market they can perform well, but when the market turns - watch out! If you are prepared to accept the rollercoaster ride and are prepared to take high risks for high rewards, then these mutual funds might be the best for you, but be careful.

Best Mutual Funds - Aggressive Growth Funds

If the above growth fund doesn't give you the adrenaline rush you desire, then try the aggressive version! These fund managers are highly speculative, often buying new issues of small companies and selling them quickly. Some also invest in derivatives such as options which are very risky financial instruments. I have several sites which explain these in detail so please just follow the links above for more detailed explanations. Not the best mutual fund in my view, but if you like high risk and can afford to lose most of your capital, then they may suit your investment profile.

Best Mutual Funds - Value Funds

As the name suggests, the fund manager here will be looking for stocks which he or she thinks offer good value - to you and me this means cheap!!! My own perspective on this form of fund is simply that trying to pick tops and bottoms has ruined many better traders than me. If a stock is on the way down, then the chances are that it will continue downwards, eventually reaching a bottom where it will stay for months if not years. Undiscovered 'nuggets' often remain just that - they are undiscovered for a reason! As a trader I teach clients to invest in stocks which are going up, not down. Value fund managers will invest in a variety of companies from the small and unloved, to the large blue chip which has fallen from grace. In my humble view, trying to pick future winners from stocks in decline is a fools paradise. You may be lucky, you may not, but my view is be very careful when considering value mutual funds. They are  risky, and remember also that stocks can, and do go to zero, so you may be waiting a long time to get a return on your investment - perhaps not the best mutual funds in my view.

Best Mutual Funds - Blend Funds

As you might expect a blend fund is a mixture of the value fund and the growth fund. In terms of risk, these types of mutual fund are very hard to pin down, since the blend could be a mixture of high risk value and high risk growth. However, in very rough terms I would suggest that they sit somewhere between the two. Again we will look at risk in more detail later, but a blend fund tries to combine an increase in capital with some income from dividends. As with all mutual funds, trying to find the best ones are extremely difficult.  

Best Mutual Funds - Sector Funds

As you may know, all stocks in the market are categorised into various sectors. So for example we have the mining sector, where you will find all the companies associated with mining, or the insurance sector, or perhaps the banking sector, or utilities. The list is almost endless, and if you look at the NYSE for example there are hundreds of primary, secondary and tertiary categories for each sector. So if we take the mining example again, the primary sector might include the mining stocks, the secondary might be companies refining, and the tertiary might be companies supplying equipment and services to the industry. It can be quite confusing. I do cover sectors where I explain how to pick the best stocks to buy but it can be confusing for the new investor. So in simple terms a sector fund tracks a sector. In order to qualify as a sector fund the fund manager must invest at least 25% in one sector, but some invest up to 100% - if you believe that diversification is the key to success in investing, then it makes no sense to me to have all your eggs in one basket. Spread your risk for the best mutual funds. If the sector performs well - fine - if not then you will be in trouble as all stocks in a sector will generally rise or fall together, so you have been warned.

Best Mutual Funds - Market Cap Size

Nearly there - only two more types to go! This is probably the easiest to understand thank goodness. All stocks are designated by their market size or "cap" size which is short for capitalisation, which simply means the value of the company as listed on the stock market exchange. To work it out is very simple ( like most things in investing ) simply multiply the stock price by the number of shares outstanding - so if the stock price is $30 and they have 1.5 million shares outstanding then the market cap size is $450 million. The four main groups are shown below, but you may also come across mega cap and nano cap, which are simply very very large, and very very small!

Now clearly, a mutual fund in large cap companies will be far less risky ( with associated lower potential rewards ) than a fund in micro cap stocks, where the risks will be extremely high as will the rewards ( or losses ). So again, choosing the best mutual funds will be governed by your personal attitudes, your investment criteria, and finally your view of money and risk. Again we will look at all these issues in more detail later.

Best Mutual Funds - Focused Funds

Finally the last broad group is focused funds. As the name suggests the fund manager will only focus on a few stocks, rather than a broad portfolio, but the risk of course is a lack of diversification. Holding 5 to 10 quality stocks which you believe will perform well is fine, but in a more balanced approach the fund will generally have up to 100 stocks at any one time. If you have a particular expertise and knowledge of a market and find a focused fund to match, then this may be the best of mutual funds for you, but again do your research and be careful.

Now, having looked at stock funds, let's take a look at bond funds in our search for the best mutual funds on the market.

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