Examples of Investment Portfolios for Each of the Three Categories of Mutual Fund Investors

Examples of Investment Portfolios for Each of the Three Categories of Mutual Fund Investors

What Is an Investment Fund?

A mutual fund is a type of investment fund that pools the money of its owners to buy stocks, bonds, money market instruments, and other products. Professional money managers run mutual funds. They decide how to use the fund’s assets and try to make cash gains or income for the fund’s owners. The investing goals in a mutual fund’s prospectus are used to set up and manage the fund’s holdings.

Mutual funds let small or individual buyers buy stocks, bonds, and other products that are handled by professionals. So, each member gets a share of the fund’s wins or losses in the same way. Mutual funds invest in a large number of different stocks. The success of a fund is generally measured by the change in its overall market capitalization, which is based on the performance of the investments it holds.

Most mutual funds are part of bigger investment companies like Fidelity Investments, Vanguard, T. Rowe Price, and Oppenheimer. A mutual fund has a fund manager, who is also sometimes called a financial planner. This person is legally required to do what is best for the people who own shares in the mutual fund.


  • A mutual fund is a type of financial tool that is made up of a collection of stocks, bonds, or other assets.
  • Mutual funds are a way for small or individual buyers to get access to properly managed investments that are diverse.
  • Mutual funds are put into different groups based on the types of securities they buy, their financial goals, and the kinds of results they
  • want.
  • Mutual funds have fees, cost ratios, or payments that they pay every year, which can affect how much money they make in total.
  • Mutual funds are often invested in employer-sponsored retirement plans.

How are prices set for mutual funds?

How much the mutual fund is worth depends on how well the stocks it buys do. When a trader buys a unit or share of a mutual fund, they are buying the success of the fund’s portfolio, or more specifically, a part of the value of the portfolio. Buying a share of a mutual fund is not the same as buying shares of stock. Mutual fund shares, unlike stock, don’t give the person who owns them the right to vote. When you buy a share of a mutual fund, you are investing in a number of different stocks or other products.

The price of a share in a mutual fund is called the net asset value (NAV) per share, or NAVPS for short. The net asset value (NAV) of a fund is found by dividing the total value of the stocks in the fund’s portfolio by the number of current shares. Outstanding shares are those that are owned by all owners, large investors, and company employees or insiders.

Most of the time, you can buy or sell mutual fund shares at the fund’s present NAV, which doesn’t change during market hours but is closed at the end of each trading day. When the NAVPS is fixed, the price of a mutual fund is also changed.

The average mutual fund holds a variety of securities. This gives investors in mutual funds a chance to spread their money around. Think about an investor who only buys Google stock and bets on the company’s profits. Since all of their money is tied to one company, their gains and losses rest on how well that company does. But Google may be in the holdings of a joint fund, where the gains and losses of just one stock are balanced out by the gains and losses of other companies in the fund.

How do returns on mutual funds get worked out?

When an investor gets Apple stock, they buy a piece of the company, also called a “share.” When someone invests in a mutual fund, they are buying a piece of the fund and its assets.

Investors usually get their money back from a mutual fund in three ways, generally every three months or once a year:

  • Income comes from earnings on stocks and interest on bonds kept in the fund’s holdings. Nearly all of the income the fund earns over the course of the year is paid out as a payment to fund owners. Investors in funds often have the option of either getting a check for payments or putting the money back into the fund to buy more shares.
  • If the fund sells stocks whose prices have gone up, it gets a cash gain, which most funds share with their owners through a dividend.
  • When the price of the fund’s shares goes up, you can sell them on the market and make a profit.

When looking into the results of a mutual fund, an investor will see the “total return,” which is the change in value, up or down, of an investment over a certain time period. This includes the fund’s interest, earnings, capital gains, and any changes in its market value over time. Most of the time, total returns are estimated for periods of one, five, and ten years, as well as since the fund’s start date, also called its “inception date.”

Different kinds of mutual funds

There are different kinds of mutual funds that can be invested in, but most of them fall into one of four main groups: stock funds, money market funds, bond funds, and target-date funds.

Stock Funds

As the name suggests, this fund mostly buys equity, also called stocks. There are different subgroups within this group. Some stock funds are called small-, mid-, or large-cap based on the size of the business they invest in. Others are called by the way they invest: bold growth, income-focused, value, and so on. There are also different kinds of equity funds based on whether they invest in local (U.S.) stocks or foreign stocks. Use a style box, like the one below, to understand the whole world of equity funds.

Funds can be put into different groups based on the size of the companies they invest in, their market caps, and the growth potential of the stocks they buy. A value fund is a type of investment that looks for high-quality, low-growth companies that the market doesn’t like. Low price-to-earnings (P/E) ratios, low price-to-book (P/B) ratios, and high-income rates are all things that can be said about these companies.

On the other hand, growth funds look for companies whose earnings, sales, and cash flows have grown a lot. Most of the time, these businesses have high P/E rates and don’t give payouts. A “blend” is an investment that is a balance between true value and growth investments. A “blend” just means that the company is neither a value stock nor a growth stock, but is somewhere in the middle.

Style Box Equity

Large-cap companies have high market capitalizations and are worth more than $10 billion. Market capitalization is found by increasing the price of a share by the number of existing shares. Large-cap stocks usually come from blue-chip companies that most people have heard of. Small-cap stocks are those whose market capitalization is between $250 million and $2 billion. Most of the time, these smaller companies are younger and risky bets. Mid-cap stocks are between small-cap and large-cap stocks.

A mutual fund’s plan can be a mix of the way it invests and the size of the companies it invests in. For example, a large-cap value fund would look for large-cap companies with good finances but falling share prices. These companies would be in the upper left part of the style box (large and value). The opposite of this would be a small-cap growth fund that invests in new technology companies that have good growth chances. A mutual fund like this would be in the bottom right corner (small and growing).

Bond Funds

A stable income fund is a type of mutual fund that has a minimum yield. A fixed-income mutual fund invests in things like government bonds, business bonds, and other debt assets that pay a set rate of return. The fund stock makes money from interest, which is given to the owners.

These funds are sometimes called “bond funds,” and they try to buy bonds that are cheap so that they can sell them for a profit. The profits on these mutual funds are likely to be better, and bond funds are not risk-free. For example, a fund that focuses on high-yield bad bonds is much riskier than a fund that invests in government assets.

Because there are so many different kinds of bonds, bond funds can be very different based on where they spend, and all bond funds are subject to interest rate risk.

Index Funds

Average funds buy stocks that track a big market average, like the S&P 500 or the Dow Jones Industrial Average (DJIA). Analysts and advisers don’t have to do as much study for this strategy, so owners pay less. These funds are often made with cost-conscious investors in mind.

Balanced Funds (Balanced Funds)

Balanced funds put their money into a mix of stocks, bonds, money market instruments, and other investments. The goal of this fund, which is called an asset allocation fund, is to lower the risk of being exposed to different types of assets.

Some funds are set up with a fixed allocation plan, so the owner knows how much of each asset class they will get. Other funds use a method for changing percentage allocations to meet the different goals of investors. This could mean reacting to changes in the market, in the business cycle, or in the investor’s own life.

Most of the time, the portfolio manager has the freedom to change the mix of asset types as needed to keep the fund’s stated strategy intact.

Money Market Funds

The money market is made up of short-term debt assets that are safe and don’t pose any risks. Most of these are government Treasury bills. An owner won’t make a lot of money, but their original investment is safe. A normal return is a little more than what you would get from a regular bank or savings account and a little less than what you would get from the average CD.

Income Funds

Income funds get their name from what they do, which is to provide a steady stream of present income. These funds mostly put their money into government debt and high-quality business debt. They hold on to these bonds until they mature so that they can pay out interest. Even though fund stocks may go up in value, the main goal of these funds is to give owners a steady run of cash. So, these funds are for careful buyers and people who are already retired.

Funds from around the world

An international fund, also called a “foreign fund,” is a type of investment fund that only buys assets outside of the investor’s home country. Global funds, on the other hand, can put their money anywhere in the world. Their instability is often based on the business and political threats of each country. But these funds can be a part of a well-balanced strategy because the returns in other countries may not be linked to the returns at home.

Specialized Funds

Sector funds are strategy funds that focus on certain parts of the economy, like the banking, technology, or healthcare areas. area funds can be very risky because stocks in the same area tend to go up and down together a lot.

Regional funds make it easy to pay attention to a certain part of the world. This can mean putting your attention on a larger area or just one country.

Ethical funds, which also go by the name “socially responsible funds,” only invest in companies that meet certain rules or views. Some socially responsible funds, for example, don’t invest in “sin” businesses like marijuana, booze, weapons, or nuclear power. Other funds put most of their money into green technologies, like solar and wind power, recycling, and biofuels.

Exchange Traded Funds (ETFs)

The exchange-traded fund (ETF) is a variation on the mutual fund. They are not mutual funds, but their methods are similar to those of mutual funds. They are set up as investment trusts that can be bought and sold on stock markets. They also have the perks of stocks.

During the business day, ETFs can be bought and sold. ETFs can also be bought on credit or sold short. ETFs also usually have lower fees than mutual funds that do the same thing. Many ETFs also benefit from busy options markets, where buyers can protect their investments or use them as a way to make more money.

ETFs also enjoy tax benefits from mutual funds. ETFs tend to be less expensive and easier to buy and sell than mutual funds.

Mutual Fund Fees

A mutual fund has running fees or membership fees that are paid every year. The spending ratio is the percentage of the funds under control that are spent on running costs each year. This number is generally between 1% and 3%. The overhead ratio of a fund is the amount of the advice or managing fee and the costs of running the fund.

Shareholder fees are things like sales charges, rebates, and refund fees that investors pay directly when they buy or sell funds. “The load” of a mutual fund refers to sales charges or fees. When there is a front-end load on a mutual fund, fees are charged when shares are bought. When an owner sells their shares, they pay fees to the mutual fund. This is called a “back-end load.”

But sometimes, a financial company will offer a mutual fund that doesn’t have any fee or sales charge. This is called a “no-load” mutual fund. Instead of going through a third party, a financial company gives out these funds immediately. Some funds also charge fees and fines if you take your money early or sell your holdings before a certain amount of time has passed.

Types of Shares in a Mutual Fund

At the moment, most people who want to buy mutual funds with A-shares do so through a broker. This purchase comes with a front-end load of up to 5% or more, as well as 12b-1 fees for management and ongoing fees for payments. Financial advisors who sell these goods may try to get their clients to buy those with bigger loads so they can make more money. When a client buys into a front-end fund, they pay these costs at the same time.

To fix these problems and meet fiduciary-rule standards, investment companies have started naming new share classes, such as “level load” C shares, which usually don’t have a front-end load but do have a 12b-1 annual payout fee of up to 1%.

Class B shares are for funds that charge management and other fees when a client sells their shares.

Are Mutual Funds a Safe Investment?

When you buy securities like stocks, bonds, or mutual funds, you take a certain amount of risk. Unlike savings in banks and credit unions that are protected by the FDIC and the NCUA, money that is put in securities is usually not publicly insured.

Can shares in a mutual fund ever be sold?

Mutual funds are considered flexible investments, and you can sell your shares at any time. However, you should check the fund’s rules to see if there are any trading or refund fees. There may also be tax consequences for capital gains made from the sale of a mutual fund.

What is a mutual fund with a target date?

Target-date funds, also called life-cycle funds, are a popular way to put money into a 401(k) or other retirement savings account. If you choose a fund with a goal date around retirement, like FUND X 2050, the fund claims to adjust and change the risk profile of its investments as the fund gets closer to the target date. Usually, this means that the investments will become less risky.

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