Which mutual fund

While the objectives are similar to those of a balanced fund, dynamic allocation funds do not have to hold a specified percentage of any asset class.

The portfolio manager is therefore given freedom to switch the ratio of asset classes as needed to maintain the integrity of the fund's stated strategy. The money market consists of safe risk-free , short-term debt instruments, mostly government Treasury bills. This is a safe place to park your money. You won't get substantial returns, but you won't have to worry about losing your principal. A typical return is a little more than the amount you would earn in a regular checking or savings account and a little less than the average certificate of deposit CD.

Income funds are named for their purpose: to provide current income on a steady basis. These funds invest primarily in government and high-quality corporate debt, holding these bonds until maturity in order to provide interest streams. As such, the audience for these funds consists of conservative investors and retirees. Because they produce regular income, tax-conscious investors may want to avoid these funds. An international fund or foreign fund invests only in assets located outside your home country.

Global funds , meanwhile, can invest anywhere around the world, including within your home country. It's tough to classify these funds as either riskier or safer than domestic investments, but they have tended to be more volatile and have unique country and political risks. On the flip side, they can, as part of a well-balanced portfolio, actually reduce risk by increasing diversification , since the returns in foreign countries may be uncorrelated with returns at home.

Although the world's economies are becoming more interrelated, it is still likely that another economy somewhere is outperforming the economy of your home country. This classification of mutual funds is more of an all-encompassing category that consists of funds that have proved to be popular but don't necessarily belong to the more rigid categories we've described so far.

These types of mutual funds forgo broad diversification to concentrate on a certain segment of the economy or a targeted strategy. Sector funds are targeted strategy funds aimed at specific sectors of the economy, such as financial, technology, health, and so on. Sector funds can, therefore, be extremely volatile since the stocks in a given sector tend to be highly correlated with each other.

There is a greater possibility for large gains, but a sector may also collapse for example, the financial sector in and Regional funds make it easier to focus on a specific geographic area of the world. This can mean focusing on a broader region say Latin America or an individual country for example, only Brazil.

An advantage of these funds is that they make it easier to buy stock in foreign countries, which can otherwise be difficult and expensive. Just like for sector funds, you have to accept the high risk of loss, which occurs if the region goes into a bad recession. Socially responsible funds or ethical funds invest only in companies that meet the criteria of certain guidelines or beliefs. For example, some socially responsible funds do not invest in "sin" industries such as tobacco, alcoholic beverages, weapons, or nuclear power.

The idea is to get competitive performance while still maintaining a healthy conscience. Other such funds invest primarily in green technology, such as solar and wind power or recycling. A twist on the mutual fund is the exchange traded fund ETF. These ever more popular investment vehicles pool investments and employ strategies consistent with mutual funds, but they are structured as investment trusts that are traded on stock exchanges and have the added benefits of the features of stocks.

For example, ETFs can be bought and sold at any point throughout the trading day. ETFs can also be sold short or purchased on margin. ETFs also typically carry lower fees than the equivalent mutual fund. Many ETFs also benefit from active options markets, where investors can hedge or leverage their positions. ETFs also enjoy tax advantages from mutual funds.

Compared to mutual funds , ETFs tend to be more cost effective and more liquid. The popularity of ETFs speaks to their versatility and convenience. A mutual fund will classify expenses into either annual operating fees or shareholder fees. Annual operating fees are collectively known as the expense ratio.

A fund's expense ratio is the summation of the advisory or management fee and its administrative costs. Shareholder fees, which come in the form of sales charges, commissions, and redemption fees, are paid directly by investors when purchasing or selling the funds. Sales charges or commissions are known as "the load" of a mutual fund. When a mutual fund has a front-end load, fees are assessed when shares are purchased.

For a back-end load, mutual fund fees are assessed when an investor sells his shares. Sometimes, however, an investment company offers a no-load mutual fund, which doesn't carry any commission or sales charge. These funds are distributed directly by an investment company, rather than through a secondary party.

Some funds also charge fees and penalties for early withdrawals or selling the holding before a specific time has elapsed. Also, the rise of exchange-traded funds, which have much lower fees thanks to their passive management structure, have been giving mutual funds considerable competition for investors' dollars. Articles from financial media outlets regarding how fund expense ratios and loads can eat into rates of return have also stirred negative feelings about mutual funds.

Mutual fund shares come in several classes. Their differences reflect the number and size of fees associated with them. Currently, most individual investors purchase mutual funds with A shares through a broker. To top it off, loads on A shares vary quite a bit, which can create a conflict of interest. Financial advisors selling these products may encourage clients to buy higher-load offerings to bring in bigger commissions for themselves.

With front-end funds, the investor pays these expenses as they buy into the fund. Funds that charge management and other fees when an investor sell their holdings are classified as Class B shares.

The newest share class, developed in , consists of clean shares. Clean shares do not have front-end sales loads or annual 12b-1 fees for fund services. By standardizing fees and loads, the new classes enhance transparency for mutual fund investors and, of course, save them money. There are a variety of reasons that mutual funds have been the retail investor's vehicle of choice for decades.

The overwhelming majority of money in employer-sponsored retirement plans goes into mutual funds. Multiple mergers have equated to mutual funds over time. Diversification , or the mixing of investments and assets within a portfolio to reduce risk, is one of the advantages of investing in mutual funds.

Experts advocate diversification as a way of enhancing a portfolio's returns, while reducing its risk. Buying individual company stocks and offsetting them with industrial sector stocks, for example, offers some diversification. However, a truly diversified portfolio has securities with different capitalizations and industries and bonds with varying maturities and issuers. Buying a mutual fund can achieve diversification cheaper and faster than by buying individual securities.

Large mutual funds typically own hundreds of different stocks in many different industries. What types of mutual funds are there? What are the benefits and risks of mutual funds? How to buy and sell mutual funds Understanding fees Avoiding fraud Additional information. Mutual funds are a popular choice among investors because they generally offer the following features:. Most mutual funds fall into one of four main categories — money market funds, bond funds, stock funds, and target date funds.

Each type has different features, risks, and rewards. Mutual funds offer professional investment management and potential diversification. They also offer three ways to earn money:. All funds carry some level of risk. With mutual funds, you may lose some or all of the money you invest because the securities held by a fund can go down in value.

Dividends or interest payments may also change as market conditions change. But past performance can tell you how volatile or stable a fund has been over a period of time. The more volatile the fund, the higher the investment risk. Investors buy mutual fund shares from the fund itself or through a broker for the fund, rather than from other investors. The fund usually must send you the payment within seven days.

Before buying shares in a mutual fund, read the prospectus carefully. As with any business, running a mutual fund involves costs. Funds pass along these costs to investors by charging fees and expenses.

If not, then it goes under debt funds. A hybrid mutual fund invests across both equity and debt securities. Mutual funds should be considered as an investment option by everyone at some point in their life. Investing in mutual funds is one of the best ways to achieve your goals. Every mutual fund comes with certain objectives to achieve. Therefore, whenever you are planning to invest in mutual funds, you have to ensure that your objectives are in line with that of the fund under consideration.

Investing in via an SIP alleviated the need to arrange a lump sum. Therefore, you can get started with your investment journey with a small amount. There are mutual fund plans that allow you to invest a sum as low as Rs a month through an SIP. This option is not available with most other investment options. Every investment option comes with a risk attached. No investment is absolutely safe, including deposits.

The risk level of mutual funds varies across types as it directly depends on the underlying assets. Therefore, you should invest in a mutual fund scheme only if you are willing to assume the risk that comes attached to it. The following are some of the parameters that must be considered while selecting the top-performing funds:. A top-performing fund typically has an excellent track record of providing higher returns over the last three and five years.

The performance of these funds would have outperformed their benchmark and peer funds. The performance of a top-performing fund is not affected much by the market movements. However, you need to note that past performance is not indicative of future returns. It is important to assess the financial ratios such as alpha and beta before deciding if a fund under consideration is a top-performing one in its category.

Returns and risk always go hand in hand. Returns are the rise in the overall value of the capital invested. Risk is defined as the uncertainty associated with an investment, and this concerns the possibility of not receiving any or negative returns due to numerous reasons. Hence, any investor must assess the risk-return potential, and this has made the risk-return analysis possible by financial ratios. Sharpe and Alpha ratios provide much-needed information. Sharpe ratio is indicative of the excess return that the fund has delivered on the addition of every unit of risk being taken.

Hence, funds with higher Sharpe ratio are considered better than those with a lower Sharpe ratio. Alpha shows the additional returns that the fund manager has generated as compared to the benchmark. Funds with higher Alpha are considered better. Expense ratio is a very crucial factor that must be analysed when choosing a mutual fund plan. Expense ratio is the fee charged by the fund houses to manage your investment.

It is deducted from the returns that an investor would get. Needless to say, a higher expense ratio reduces the take-home returns of investors. The fund houses cannot charge more than the limit set by the Securities and Exchange Board of India.

The expense ratio of a fund scheme should justify the returns provided. A frequent shuffling of the assets in the portfolio increases your cost of investment expense ratio as the fund manager incurs higher transaction costs. Check for the consistency in the expense ratio and ensure that you are incurring reasonable charges as the expense ratio. If you come across two funds with a similar asset allocation and past performance, then you may choose to invest in the one with the lower expense ratio.

Investments in any scheme should be made only after carefully assessing life goals. Once an assessment of the needs has been made, you need to map it with the objectives of a mutual fund scheme to find out if investing in it yields you the desired result.

You can base your mutual fund selection activity on the fund history. Opinions expressed are solely those of the reviewer and have not been reviewed or approved by any advertiser. The information, including any rates, terms and fees associated with financial products, presented in the review is accurate as of the date of publication. While we adhere to strict editorial integrity , this post may contain references to products from our partners.

Here's an explanation for how we make money. Founded in , Bankrate has a long track record of helping people make smart financial choices. All of our content is authored by highly qualified professionals and edited by subject matter experts , who ensure everything we publish is objective, accurate and trustworthy.

Our investing reporters and editors focus on the points consumers care about most — how to get started, the best brokers, types of investment accounts, how to choose investments and more — so you can feel confident when investing your money. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. We value your trust. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens.

We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers.

Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy.

You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. Bankrate follows a strict editorial policy , so you can trust that our content is honest and accurate.

The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories.