Mutual Funds: Matching Financial Objectives

Details

Last Updated: Tuesday, 17 March 2020

In part two of this four-part series, we're going to explain how to start the process of researching a mutual fund. In this step, the investor will be looking to align their financial objectives with that of the mutual fund.

Mutual Fund Research and Financial Objectives

It's important for an investor to understand their financial objectives before starting their research. Skipping this step is a big mistake because there is a wide array of mutual funds, each of which will have a stated objective. For example, some funds will concentrate on a specific industry, while others will attempt to track certain stock market indices.

Additional Resources

Buying Mutual Funds Part I Buying Mutual Funds Part III Buying Mutual Funds Part IV Mutual Fund Rating Mutual Fund Research Mutual Fund Performance

If an investor understands their financial objectives, they can be more efficient in their research by ensuring their objectives are aligned with those of the fund. This point is illustrated by the following two examples.

Saving for College

One group of investors might consider purchasing mutual funds as a good way to save for college expenses. In this example, the ideal fund will have a relatively long timeframe, with an investment portfolio that would maximize growth in the early years. The mutual fund selected needs to align with both this objective and timeframe.

Retirement Income

Another group of investors might consider buying into a mutual fund as part of the retirement planning strategy. This type of investor might be less interested in the growth of their account and more interested in its short-term, income-producing potential.

Different Types of Mutual Funds

As explained below, there are just a few basic categories of mutual funds. From these basic categories, many different combinations of funds are possible. In the paragraphs below are definitions and explanations for each of those four basic categories.

Growth Funds

Also referred to as value funds, a growth fund's investment objective will be to maximize return on investment. For this reason, growth funds will take additional risks; hoping to maximize that return. It's a classic example of the balance of risk and reward at play. Growth funds are a great choice for investors that do not need a steady source of income in the near term.

Income Funds

Income-producing mutual funds will attempt to maximize the income benefit of the fund, while preserving the investor's capital. Mutual funds can produce income by investing in bonds, or by selecting stocks with high dividend rates. Income mutual funds are a great choice for investors that are looking for a reliable source of money flowing into a household each month.

Balanced Funds

A balanced mutual fund is a hybrid, or compromise, between growth and income. These funds are sometimes referred to as blend funds. With this type of mutual fund, the investor is assuming slightly more risk in exchange for additional growth potential. A balanced fund is a good choice for an investor that is looking for growth potential, while still preserving some income-producing capabilities.

Specialty Mutual Funds

This final category of mutual funds includes those that invest in a narrow range of companies. This range is determined either by size, industry, or geography. Examples of specialty mutual funds include:

• Mid Cap, Small Cap, and Large Cap Funds
• Domestic, Foreign, International, Overseas, or Global Funds
• Precious Metals, or Gold Mutual Funds
• Long-Term, Short-Term, Bond Funds
• Municipal Bond Funds
• Communications, Healthcare, Technology Funds

This is but a small sampling of the types of specialty funds that an investor might encounter as part of their research. Companies managing and offering these funds are in the business of attracting money from investors. By creating a wide array of options, these companies can attract an even wider array of investors.

Next Up: Evaluating Mutual Funds

Up to this point we've discussed the basics of mutual funds, including terminology and risk. In this article, we discussed the importance of aligning the investor's financial objectives with that of the mutual fund. With that information as a background, it's time to start talking about how to evaluate a mutual fund's performance.

---

About the Author - Mutual Funds: Matching Financial Objectives

---