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Data as of Dec. 31, 2002
Sources: Morningstar, iMoneyNet |
WHY ARE THERE so many different types of funds? Mostly because there are so many different ways to invest.
A fund manager's job is to create a portfolio that blends different types of stocks and bonds to achieve the maximum return for a given level of risk. Some managers are more willing to roll the dice on risky stocks in search of high rewards. Others are more defensive, seeking reasonable gains without the threat of big losses. Some invest only in foreign stocks, some favor small companies, some like utilities — the list goes on.
For investors, this diversity provides the opportunity to tailor a portfolio of funds to meet particular objectives. Take a 55-year-old man eyeing retirement in a few years. Seeking some growth but not much risk, he may put part of his money into a steady, large-company equity fund, while protecting the bulk of his nest egg in a money-market fund with lower — but virtually guaranteed — returns. A 30-year-old woman, on the other hand, has years to make up for any short-term investment losses. So she may want to put most of her money in a more aggressive equity fund that promises more risk, but higher returns.
No Need to Get Fancy
Unfortunately, the fund industry has gone on a rampage of market segmentation in recent years, trying to attract new fee-paying customers with ever more exotic offerings. Between 1995 and 2002, the number of funds to choose from ballooned from 5,728 to 8,279 (including money-market funds).
Now there are funds geared to just about any investment objective — from funds that buy only genomics stocks to those that invest only in Russian companies. This has encouraged some investors to move in and out of funds like stock traders, trying to time the market. What gets lost in the shuffle is a simple, time-honored principle: Investors do best if they pick a set of promising stocks or funds and leave their money in them for the long term.
If all this sounds hopelessly confusing, it doesn't have to be. Most people's investment objectives can be satisfied without getting fancy. The truth is, there are only a few broad categories of funds that really matter to most people. And if you are investing through your retirement plan at work, you'll probably be limited to those groups, anyway.
The applet above gathers together what we feel are the essential fund categories to know about. You can compare them in terms of average return, risk and expense. If you click on the fund type when it lights up, it will take you to another page that describes that fund type in detail. Or click the "next" button on the bottom of this page and you'll go right to the Index Funds page.
One more thing before we move on: Every fund has to publish a document called a prospectus that clearly states its strategy, or "investment style." Some managers have been known to drift from this strategy — something you have to watch out for — but the good ones toe the line.
