Money Market Funds ◦ The money market consists of short-term debt instruments, mostly Treasury bills. This is a safe place to park your money. You wont get great returns, but you wont have to worry about losing your principal. Bond/Income Funds ◦ Income funds are named appropriately: their purpose is to provide current income on a steady basis. When referring to mutual funds, the terms "fixed-income," "bond," and "income" are synonymous. These terms denote funds that invest primarily in government and corporate debt. ◦ Bond funds are likely to pay higher returns than certificates of deposit and money market investments, but bond funds arent without risk. Because there are many different types of bonds, bond funds can vary dramatically depending on where they invest
Balanced Funds ◦ The objective of these funds is to provide a balanced mixture of safety, income and capital appreciation. The strategy of balanced funds is to invest in a combination of fixed income and equities. A typical balanced fund might have a weighting of 60% equity and 40% fixed income. Equity Funds ◦ Funds that invest in stocks represent the largest category of mutual funds. Generally, the investment objective of this class of funds is long-term capital growth with some income
Global/International Funds ◦ An international fund (or foreign fund) invests only outside your home country. Global funds invest anywhere around the world, including your home country. Specialty Funds ◦ This classification of mutual funds is more of an all-encompassing category that consists of funds that have proved to be popular but dont necessarily belong to the categories weve described so far. This type of mutual fund forgoes broad diversification to concentrate on a certain segment of the economy. Sector fund are targeted at specific sectors of the economy such as financial, technology, health, etc. Sector funds are extremely volatile. Regional funds make it easier to focus on a specific area of the world. Socially-responsible funds (or ethical funds) invest only in companies that meet the criteria of certain guidelines or beliefs
Index Funds ◦ The last but certainly not the least important are index funds. This type of mutual fund replicates the performance of a broad market index
A mutual fund that invests predominantly or exclusively in securities issued in foreign countries. An international fund does not necessarily concentrate on any single country, but it does not invest in securities from the country in which it operates. An international fund should not be confused with a global fund, which invests in both domestic and foreign securities.
Currency Exchange ◦ When you put money into an international mutual fund, you will have to convert your dollars into another currency. ◦ While the money is in the fund, it will earn returns on your investment. ◦ Then, when you cash out your mutual fund shares, they will pay you in the foreign currency. ◦ If the dollar has declined in value while you were investing, you will actually be able to come out ahead on the exchange rate. You will be able to get more dollars for the foreign currency that you are trading. ◦ This gives you profit from the investment and profit from the currency exchange as well.
Diversification ◦ When the United States dollar falls in value, it has a lot to do with the economy of the United States. ◦ This happens when the economy is down and things are going poorly for a lot of people financially. ◦ When the economy is down, many investments also perform poorly. The companies that trade on the stock exchange depend on consumers to spend money with them. ◦ When no one is spending money, it has a negative effect on these investments. If you have all of your money in domestic mutual funds and domestic stocks, it can significantly hurt your portfolio during these times. ◦ By putting money into some international mutual funds, you will still be able to earn decent returns even if the domestic economy is down.
Emerging Markets ◦ Another benefit that you can realize with many of these funds is that you can invest into emerging markets. ◦ There are many areas across the globe that are considered to be underdeveloped by United States standards. ◦ Many of these areas are starting to develop slowly and build the necessary infrastructure to become a modern society. ◦ During these times, there is a phenomenal potential for investors to realize a return. ◦ All of the different types of businesses that can grow in these markets gives investors a great opportunity to profit.
The Risks of Foreign Investing ◦ While international diversification may help to reduce overall portfolio risk over time, there are important differences between domestic and foreign investing that can affect the day-to-day volatility of international holdings: Political or economic instability in foreign countries could negatively affect foreign investments, especially in emerging markets such as Differing regulatory environments, Trading days, Accounting standards, and Higher transaction costs Fluctuating foreign exchange rates can increase or decrease the dollar value of an investment even if the security’s price remains unchanged. Financial information about specific companies in emerging markets can be difficult to obtain Subject to abrupt and severe price declines, and should be regarded as speculative.