Mutual funds

When you invest in a mutual fund, your money is pooled with money from other investors to buy a portfolio, or group of stocks, bonds or other investments. Most mutual funds are open-end funds, which means they typically sell as many shares as investors want to buy and repurchase any shares that investors want to sell.

There are three major groups, or types, of mutual funds:

• Stock funds buy shares of corporate stock
• Bond funds buy bonds issued by corporations, governments or agencies
• Money market funds buy very short-term bonds and other loans

Each fund group has a number of subcategories, based on narrower distinctions in the way the fund invests. For example, some stock funds invest almost exclusively in small-company stocks and other funds focus on large-company stocks.

Goal-oriented investing

Each fund has a specific investment objective, which is the goal it strives to meet by making particular types of investments. For example, a stock fund whose objective is to provide a combination of gradually increasing prices and regular income might buy stock issued by large companies with strong reputations for success and a history of paying regular dividends. 

As an investor, you need to be aware that funds with different investment objectives have different levels of risk. A stock fund that invests primarily to benefit from increasing stock prices is much more likely to move up and down in value relatively quickly than a bond fund that invests for regular fixed income.

You can find an assessment of the risk a fund poses as well as its investment objective in its prospectus, an official document that also states the fund's investment objective, fees and past performance. You should become familiar with a fund's prospectus before you invest any money in that fund.