(For a more
specific list of types of mutual funds,
check out the
previous lesson.)
Index Funds:
An index fund is a fund (a collection of
stocks and/or bonds) that is designed to
mimic the performance of a large chunk
of the stock market. For example,
you can buy a single fund that will,
basically, grab the entire
S & P 500 for you. This keeps you
very diversified. Also, index
funds typically have very low expenses,
so you win there too. You can even
get index funds to mimic specific
categories -- like large blend or real
estate. If you don't have time to
learn a lot of details about investing,
index funds are a great way to invest.
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Life
Cycle
/ Target Retirement Funds:
If you want to do one-stop,
no-fuss-no-muss shopping for your
investments, life cycle (target retirement)
funds are for you. They are a pretty
new thing for most investment companies, but
they are the new buzz. Here's how they
work: How old are you? Let's say
you're 20... So, you're going to
retire in about 2050... You can buy
just one fund and it will always
(supposedly) be perfectly balanced and with
the appropriate risk for your age. |
When you are 25, the
fund will be a large percent of stocks
and include some high risk stuff... When you
are 45, the fund will be less stock and
more bonds (which are safer) and the
risks will be on the average side...
When you are 60, the fund will be mostly
bonds with a little stock and everything
will be pretty low risk. The key
with these is to buy them with a company
you can trust. AND you'll want to
have a good manager since you are,
basically, trusting him with your
retirement! Of course, you don't
have to put all your money into one of
these -- you can always just have this
as part of your portfolio.
UPDATE:
I've learned something new about life
cycle funds since I first wrote this...
Just like a mutual fund is a box of
stocks (and maybe bonds), a life cycle
fund is a box of other mutual funds from
the same company! I was thinking
of buying one... So, of course, I
started investigating! I got the
list of funds INSIDE the fund. I
started to investigate each fund (there
were about 25 of them)... The
first thing I did was to check their
Morningstar rating... To my shock,
all but one of them were only 2 and 3
stars! (One was 4.) There is
no way on earth that I would buy a 2 or
3 star fund, so why would I buy a big
box of 25 of them?
It
almost makes me wonder if these life
cycle funds were created just so SOMEONE
would buy all those inferior mutual
funds -- even if they don't know they
are doing it! So, investigate
what's IN the fund before you buy it!
Exchange Traded Funds (ETFs):
These are a lot like index funds in that
they track big indexes like the S & P
500 or mid-caps... But you buy and
sell them like a stock -- anytime during
the day on the American Stock Exchange.
(Mutual funds can only be sold at the
end of the day.) ETFs can be sold
short and you can even buy them on
margin... Anything you can do with
and to a stock, you can do with an ETF.
They have cool names too, like Spiders (SPDRs),
VIPERs, Qubes and Diamonds. ETFs
usually have fewer expenses than index
funds, but you have to pay a fee to buy
and sell them (just like with stocks.)
If you don't have the usually $1000+
entrance fee for a mutual fund, you may
want to try these because you can get in
really cheaply... You can even buy
just 1 share!
Unit
Investment Trusts
(UITs):
Unit investment trusts (UITs) are,
pretty much, like exchange traded funds
(ETFs) except that they have a
termination date. Yep, they expire
and, when that end date comes, you have
to sell -- whether it's a good time to
sell or not.
Real
Estate Investment Trusts (REITs):
These act like exchange traded funds (ETFs),
but they specialize in real estate.
There are three types: equity REITs
(these invest in and own real estate),
mortgage REITs (these loan money to
others in the form of a mortgage) and
hybrid REITs (which are a blend of
equity and mortgage).
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