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What are mutual funds? Types, fees, and FAQs
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The basics: What is a mutual fund?
What are the returns from mutual funds?
- Total returns include capital gains (or losses) from changes in the value of the fund's investments. Total returns also include any income that was generated, such as dividends or interest payments.
- Annualized returns are the average rate of return each year with a specific period, such as one year, three years, or five years.
Types of mutual funds
- Equity funds: These funds invest primarily in stocks or equities, aiming for capital appreciation over the long term. Equity funds may focus on specific sectors, industries, market capitalizations (large-cap, mid-cap, or small-cap), or geographic regions.
- Bond funds: Bond funds invest in fixed-income securities such as government bonds, corporate bonds, municipal bonds, or mortgage-backed securities. These funds provide regular income through interest payments and are less risky than equity funds.
- Money market funds: Money market funds invest in short-term, high-quality debt securities such as Treasury bills, certificates of deposit (CDs), and commercial paper. These funds are considered relatively low risk, with more stability and liquidity.
- Balanced or hybrid funds: Balanced funds invest in a mix of stocks and bonds, so there’s more diversification across asset classes. These funds try to strike a balance between managing risk, generating income, and giving capital a chance to appreciate.
- Index funds: Index funds passively track a specific market index, such as the S&P 500 or the FTSE 100, by holding a portfolio of securities that mirror the index's composition. These funds replicate the performance of the index they track and typically have lower fees than actively managed funds.
- Sector funds: Sector funds focus on specific sectors or industries, such as technology, healthcare, energy, or financial services. These funds can capitalize on growth opportunities within a particular sector, but on the other hand, may be more vulnerable if there’s a downturn in that industry.
- International or global funds: International or global funds invest in securities issued by companies outside of the investor's home country. These funds let investors access international markets and may invest in developed or emerging market economies.
- Target-date funds: Target-date funds, or lifecycle funds, are designed to align with your retirement timeline. These funds automatically adjust their asset allocation over time, becoming more conservative as the target retirement date approaches.
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Understanding the fees of mutual funds
- Management fees: These fees compensate the fund manager and management team for their services in managing the fund's portfolio. Management fees are typically expressed as a percentage of the fund's assets under management (AUM) and are deducted from the fund's assets on an ongoing basis.
- Expense ratio: The expense ratio represents the total annual operating expenses of the fund, including management fees, administrative expenses, and other costs. The ratio is expressed as a percentage of the fund's average net assets. Expense ratios are disclosed in the fund's prospectus and can vary widely among funds.
- Other fees: Mutual funds may also charge other fees, such as redemption fees, account maintenance fees, or 12b-1 fees (marketing and distribution expenses), which can impact an investor's overall return.
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Disclaimer
FAQs
- What's the difference between mutual funds and index funds?
- What's the difference between mutual funds and ETFs?
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