If you are just considering purchasing mutual funds or trying to decide how to allocate your 401K, you may be wondering about the different types of mutual funds. It can be confusing to choose how to distribute your money if you do not understand the difference between a growth fund and a value fund. Once you understand the difference in the types of funds, you still need to look carefully at the particular fund you choose. You should compare long term growth, rate of return and the fees associated with each fund.
1. Growth Funds
A growth fund is a fund that buys stock in companies that are increasing rapidly in value. These funds will then sell the stocks at a profit. The risks with growth funds are much higher than other funds, because they buy stocks in companies that are a little bit more risky. These funds have higher fees associated the fund, because the stocks are sold more often. These funds are more aggressive, and as a result the growth is the greatest over long periods of time.
2. Value Funds
A value fund is a fund that buys stocks when they are undervalued and holds onto them as they grow. This is not a fund where they sell stocks as often. The stocks they purchase usually have good dividends, which is one of the ways that they make money. The fees associated with this account are lower, because they hold onto the stocks for a longer period of time. The risks associated with this are much lower. Value funds are considered to be a conservative estimate.
3. Index Funds
An index fund is a fund that tries to match the growth of the various indexes, such as the NASDAQ or the S&P 500. These funds work in two different ways. Some of the mutual funds hold stocks from all of the companies listed over the index, while others pick and choose a few stocks over the wide spectrum. The fees on these are generally the lowest since the companies do not often sell the stocks.
4. Blend Funds
A blend fund is a mutual fund that combines its holdings with portions of the other types of funds. They may additionally have other means of investing as well. The risk is more spread out, but it can also limit the growth potential that is available. It is important that you choose a fund with a good performance record, in order to make the best blend funds investment that you can.
